Kennedy Wilson Annual Report 2014 [PDF]

A N N U A L

R E P O R T

2014

(NYSE: KW) Founded in 1977, Kennedy Wilson is a vertically integrated global real estate investment and services company headquartered in Beverly Hills, CA, with 25 offices in the U.S., U.K., Ireland, Spain, Jersey and Japan. The company, on its own or with partners, invests opportunistically in a variety of real estate related investments, including commercial, multifamily, loan purchases and originations, residential and hotels. Kennedy Wilson offers a comprehensive array of real estate services including investment management, property services, auction, conventional sales, brokerage and research.

THE RITZ-CARLTON HOTEL AND RESIDENCES IN LAKE TAHOE, CA

2014 A RECORD YEAR

1.7BILLION

$

ADJUSTED EBITDA $ in millions

KENNEDY WILSON LAUNCHED

300

100%

318

CAGR

59%

250

GROWTH IN 2014

200

IPO OF KWE ON THE LONDON STOCK EXCHANGE $5.4 BILLION OF CAPITAL

350

159 150

97

100

70

55 50 1

0

RAISED IN 2014

31

2009

2010

2011

2012

2013

2014

$ in millions

ASSETS UNDER MANAGEMENT

$2.5

20,000

18,100

CAGR

26%

15,000

$2.9

22% GROWTH IN 2014

14,800 12,700

11,800 10,000

Equity Debt

6,988 5,600 5,000

$4.3 BILLION IN INVESTMENT TRANSACTIONS

2009

2010

2011

2012

2013

2014

2

INVESTMENT ACCOUNT $ in millions

IN 2014

2,000

1,667

CAGR

51%

1,500

$1.1 $3.2

GROWTH IN 2014

1,192 909

1,000

40%

583 364

500

212

Acquisitions Dispositions 1 2

Includes $2.2 billion of equity and $1.3 billion of debt by KWE Includes $2.4 billion of acquisitions by KWE

0

2009

2010

2011

2012

2013

2014

CAGR: Compound annual growth rate See page 108 for certain definitions and reconciliations to the most directly comparable GAAP measures. KENNEDY WILSON

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DEAR FELLOW

Shareholders, Partners, and Employees, 2014 was a milestone year for Kennedy Wilson. We celebrated our five-year anniversary as a public company, launched KWE (Kennedy Wilson Europe Real Estate Plc on the London Stock Exchange - LSE: KWE) and set record highs on almost all key performance metrics (more on this later). Our success in 2014 was due in large part to our dedicated team of global investment and services professionals who were firing on all cylinders.

KENNEDY WILSON EUROPE – A NEW CHAPTER 2014 included a landmark moment for Kennedy Wilson – the initial public offering of KWE, which was the second largest real estate IPO in the LSE’s history and the third country in which Kennedy Wilson has taken a company public (United States, Japan and United Kingdom). In 2014, KWE raised an initial $1.7 billion and completed a $565 million followon offering. Kennedy Wilson holds an approximate 16% ownership in KWE and serves as KWE’s external manager, whereby it earns a management fee and potentially certain performance fees. Our team in Europe is led by Mary Ricks, my trusted partner for over 25 years. She William J. McMorrow Chairman and Chief Executive Officer

relocated to London in 2012 to head our European efforts. We currently have more than 80 employees in our European offices and more than 2,000 operating associates. Through today, in a little over a year, KWE has amassed a portfolio in Europe that consists of four loan portfolios and 249 direct real estate assets with approximately 10 million square feet and totaling $3.2 billion in purchase price! This portfolio is currently expected to produce approximately $200 million of annualized net operating income. Needless to say, I am tremendously proud of the accomplishments of KWE in its inaugural year.

THE EVOLUTION OF KENNEDY WILSON For any business to sustain success and longevity, it must evolve. Over the years, we have responded to the needs of our company by continually growing the types of services we provide. Initially starting out as an auction company in 1977 in one office with 11 employees, we have grown into a global multi-product real estate investment and services firm across 25 offices worldwide with more than 450 employees and more than 4,000 operating associates. The Kennedy Wilson of today is truly a one-of-a-kind fully integrated real estate firm. Our services line of business includes investment management, property management, brokerage and leasing, auction and conventional sales, and research (run by our Meyers Research group). In fact, our services group manages over 71 million square feet for the company, institutional clients and other individual investors. Meyers Research

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also runs Zonda, an iPad application for companies analyzing the housing industry, and we just celebrated its first full year in service. Simply put, Kennedy Wilson has evolved into everything real estate. The progression of our company has yielded certain key advantages along the way– namely the development of close relationships with financial institutions and collaboration between all of our business lines that encourages real-time information flow and ultimately creates opportunity. In the past five years, over 75% of our deals have been opportunities sourced directly from our relationships with financial institutions. I believe this unique structure will be a key component that positions us for success in the years to come. While the opportunity set surrounding us is in constant flux, our core investment approach has not changed. The cornerstones of our success have been our nimble and disciplined investment approach coupled with deep industry relationships that we have cultivated for over 27 years. Our boots-on-the-ground teams, who have in-depth local knowledge in the areas in which they invest, are constantly performing diligence on a steady flow of real estate opportunities across many countries and real estate product types. Once we identify an appropriate opportunity with an above-average risk-adjusted return potential, we execute with speed and precision. As I have said before, our ability to seize opportunities rapidly is an important competitive advantage that has resulted in acquiring some of our most profitable investments. We have executed our core investment strategy successfully over several decades and real estate cycles. Our successes can be seen with our track record in the United States, Japan and most recently in Europe. I think it’s this disciplined investment process that has led to the favorable performance of our common stock, which has had consistent outperformance over the S&P 500 and our peer index:

ANNUALIZED TOTAL RETURN 1 YEAR

3 YEAR

5 YEAR

5 YEAR (cumulative)

KENNEDY WILSON (NYSE: KW)

15.4%

35.7%

24.5%

198.9%

S&P 500 INDEX

13.5%

20.3%

15.4%

105.0%

S&P 500 FINANCIALS INDEX

15.2%

20.4%

12.7%

81.8%

(as of 12/31/14)

199% NYSE: KW 5 Year Cumulative Total Return ALLIANCE BUILDING IN DUBLIN, IRELAND

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2014 - A RECORD YEAR 2014 marked our fifth and most successful year as a public company. Our strategic expansion continued both in the United States and in Europe in our core markets. Some of the key highlights for the year include: •

Total investment transactions by us, together with our equity

•

partners, of $4.3 billion, including record acquisitions of $3.2

Increased quarterly dividend 33% to $0.12 per share, our fourth annual increase since 2011.

billion and $1.1 billion of dispositions. •

Raised a record $5.4 billion of equity and debt capital.

•

Adjusted EBITDA grew by 100% to $317.8 million.

•

Investment account reached a record $1.7 billion and

•

Total adjusted fee revenue increased by 67% to $121 million.

•

New investment-level financings of $1.4 billion, with a weighted-average interest rate of 2.93% and a weighted– average maturity of 5.9 years.

included investments in over 32.6 million square feet,

•

Refinanced $350.0 million of corporate debt and lowered

including investments in over 20,000 multifamily units,

the fixed interest rate by 2.875% while extending out the

14 million commercial rentable square feet, 177 residential

maturity by five years, reducing $10.1 million in our annual

units, 629 residential lots and 975 hotel rooms.

interest obligation.

The terrific performance of our company comes first and foremost from the excellence of our people. I am proud to work alongside such dedicated and hard working professionals, including global teams working together to ensure all of the company’s needs are met. The Kennedy Wilson team operates with the highest level of integrity and professionalism, and I would like to thank everyone again for their amazing efforts during the year. As I look back at our growth since going public in 2009, I am pleased with the performance of our key financial metrics, all of which hit a record high in 2014. They highlight our consistent performance and underscore our ability to generate long-term shareholder value (Please refer to the “2014 - A Record Year” section located within this annual report).

LOOKING AHEAD In many ways, 2014 was a transformational year for Kennedy Wilson. With the launch of KWE, we firmly cemented our global presence as a world-class institutional owner and manager of real estate. This presence allows us to leverage our investment platform

$1.7 BILLION In 2014, the Investment account reached a record $1.7 billion

across multiple geographies and sectors. Our extensive reach, including having offices in Dublin, London, Madrid, Tokyo, and of course throughout the United States, and existing relationships with financial institutions in each of these cities will continue to allow us to source attractive investment opportunities in a growingly competitive and crowded market. For example, an existing relationship has led us into a new multifamily opportunity. We are currently under contract to acquire a 62% interest in a 30 property/5,485 unit multifamily portfolio (which we expect to close in Q2). These properties are primarily located in the Pacific Northwest and California, which are our core markets. In addition to new acquisitions, we are very focused on optimizing our current portfolio and strategically evaluating harvesting gains on certain investments where our business plan has been accomplished. The company’s asset management teams across the globe are working around the clock, literally, leasing assets and implementing business plans. Additionally, it is important to note that we currently have over 25 large scale valueadd projects in progress. For example, we are in the process of entitling approximately 3,000 residential units in the United States and Europe on land that we own, with little to no basis, within or adjacent to existing income-producing assets. If built, we estimate See page 108 for certain definitions and reconciliations to the most directly comparable GAAP measures.

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HARRINGTON SQUARE IN RENTON, WA

that these projects would have total development costs in excess of $2 billion. Finally, what may get lost in the discussion of our acquisitions is the $1.1 billion of sales that we generated in 2014. As we speak, the company is under contract to sell a majority of its interest in its Japanese multifamily portfolio, a move that could net total cash of over $100 million (pre-tax) to the company. We intend to retain our management team in Japan to help source and evaluate future opportunities in the region. I believe these components will be an important driver of incremental return for our investment portfolio and an additional source to create shareholder value. The great recession that began in 2008 feels like a lifetime ago. The lessons learned during that downturn and during our several decades of investing in real estate preceding that, however, will never be forgotten. We always remain prudent in our risk management and constantly monitor our leverage ratios. We typically hedge 50-100% of our foreign currency exposure. The availability of credit has come a long way since 2009, and Kennedy Wilson has taken advantage. We and our consolidated subsidiaries currently have approximately $1.5 billion in potential liquidity, including approximately $630 million of availability under lines of credit for KWH and KWE. In addition, interest rates continued to drop further in 2014, defying most consensus expectations. We took every opportunity we had to lower our average borrowing rate, refinancing over $650 million of corporate and investment level debt during the year. We also had new investment level financings of $1.4 billion with a weighted-average cost of borrowing of 2.93%. With that said, 84% of our debt remained hedged against long term increases in interest rates.

THANK YOU I want to take this opportunity to thank our shareholders, lenders, clients, partners, employees, board of directors, and service providers for all they have done for our company. Kennedy Wilson has grown tremendously since I bought the company in 1988 with a capital base of $57,000. It is the resolve and the resiliency of all of the individuals here that drive the success of our company. Kennedy Wilson remains armed with the strongest balance sheet in the company’s history, and our unique global platform positions us to deliver another successful year for our company, our shareholders and our partners. I can’t wait to see what the next five years bring.

William J. McMorrow Chairman and Chief Executive Officer

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FAIRMONT HOTEL* ST. ANDREWS, SCOTLAND

*Held by KWE

INVESTMENT PLATFORMS MULTIFAMILY

COMMERCIAL

LOANS

44%

28%

22%

(KW Ownership)

(KW Ownership)

20,721 Units

14.3M SQ. FT. 14%

U.S. U.K. Ireland

Ireland

21%

U.S. 47%

U.K. 73%

1%

$1.1B UPB

1%

13%

U.S.

12%

(KW Ownership)

51%

U.K.

39%

28%

Ireland

Japan

Japan

RESIDENTIAL & HOTELS

KENNEDY WILSON EUROPE REAL ESTATE PLC (LSE:KWE)

43%

15%

(KW Ownership)

U.S.

619 Lots

38%

Ireland

4,212 Acres

Target Markets:

United Kingdom

57%

U.K.

975 Hotel Rooms

(KW Ownership)

Ireland

5%

177 Residential Units

SERVICES AUM

18.1

$

BILLION

In 2014, Kennedy Wilson launched the $1.7 billion IPO and $565 million Spain follow-on offering of Kennedy Wilson Europe Real Estate Plc (LSE:KWE). KWE is the second largest real estate IPO in the LSE’s history.

71 MILLION SQUARE FEET UNDER MANAGEMENT

Information as of December 31, 2014. Investment platform information includes investments held directly by KWE. See page108 for a definition of “AUM.” Weighted average ownership shown excludes promoted interests and reflects KW’s ownership in KWE. KENNEDY WILSON

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KENNEDY WILSON EUROPE IS BORN KW LAUNCHED THE

1.7

$

BILLION IPO

and $565 million follow-on offering of Kennedy Wilson Europe Real Estate Plc (LSE:KWE). KWE is the second largest real estate IPO in LSE’s history.

333.8 2.4

$

14.0 82

$

$

MILLION

BILLION

MILLION

KW’s investment in KWE

Total KWE acquisitions in 2014

Management fees earned by KW in 2014

6.6

$

MILLION SQUARE FEET

MILLION

141 74

Expected annualized KWE NOI

EUROPEAN TEAM EMPLOYEES

DIRECT REAL ESTATE ASSETS

14.9

%

KW ownership of KWE’s share capital

up from 14

All information is as of December 31, 2014. 8

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111 BUCKINGHAM PALACE ROAD IN LONDON, ENGLAND*

FRIARS BRIDGE COURT IN LONDON, ENGLAND*

VANTAGE CENTRAL PARK IN DUBLIN IRELAND*

*Held by KWE KENNEDY WILSON

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INVESTMENTS

EUROPE

The Shelbourne Dublin The Shelbourne Dublin is an iconic five-star hotel founded in 1824 and located on St. Stephens Green in central Dublin, Ireland. In 1922, the Irish Constitution was drafted in a room at the hotel, now known as the ‘Constitution Room.’ The property is comprised of 265 rooms, including 19 suites, 12 meeting rooms, two bars, a restaurant and a spa and health club. The hotel underwent a substantial refurbishment in 2006. Kennedy Wilson acquired the loans secured by the property from two separate lenders at a substantial discount to their face value in December 2013 for a combined €112 million. Following detailed negotiations with the owners, the company obtained title to the property in August 2014. Since acquisition, Kennedy Wilson has been working closely with Marriott management to enhance the value of the property and in 2014 increased the NOI by 12% from 2013. In 2015, the company’s focus is to execute a number of strategic initiatives to further add value to the hotel.

The Shelbourne Dublin The Shelbourne is an iconic five-star hotel founded in 1824 and located on St. Stephens Green in central Dublin, Ireland.

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INVESTMENTS

COMMERCIAL

Marina View Marina View is ideally situated in the heart of the prestigious Silicon Beach market, West Los Angeles’ most dynamic and expanding community of technology, entertainment and social media companies such as Google, YouTube, EA Sports and University of Southern California’s Institute for Creative Technology. Located adjacent to the 600-acre Ballona Wetlands and one block from the Marina del Rey harbor, Marina View provides tenants with unsurpassed and unobstructed views of the Pacific Ocean. The area’s landscape and prohibitive development policies create high barriers to entry in this market. The property is also located near numerous amenities and has convenient access to freeways and Los Angeles International Airport. Marina View consists of a six-story 60,925 rentable square foot (RSF) Class A office building and a single story 14,774 RSF retail building, cumulatively totaling 75,699 RSF, as well as two stories of structured parking. When Kennedy Wilson acquired the property in 2012, the office building was vacant while the retail building was 100% leased. Kennedy Wilson repositioned and rebranded the asset to attract companies looking for cutting edge, collaborative space for recruiting and retaining the highest-quality talent. The full exterior and interior renovation included redesign of exterior seating and open spaces, installation of a digital directory, addition of an exterior water feature and repavement of the surface parking lot as well as refurbishment of the lobby, restrooms, elevator lobbies and cab interiors.

Marina View has unobstructed west facing views of the Pacific Ocean and the Marina Del Rey harbor. The property’s views to the south face the Ballona Wetlands, a 600 acre nature preserve owned and protected by the State of California.

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INVESTMENTS

M U LT I FA M I LY

Apex Apex is a 203-unit apartment development built in 2008 and located in Tacoma, Washington. Tacoma is the third largest city in the state and has experienced recent economic diversification and expansion, making it an attractive city for businesses and residents. The city is the urban center of the Southern Puget Sound and home to a vibrant business community, including strong sectors in transportation, government, technology, manufacturing, trade, healthcare and education. The Tacoma-Pierce County Economic Development Board is currently focusing on recruiting 4,000 new jobs to the region by the end of 2015 and is targeting information technology, aerospace, life sciences, logistics/international trade and clean technology as key industry clusters to support the area’s growth. Just five minutes from downtown, Apex is set on one of the highest points in the area, offering scenic views of the city and Mt. Rainier. The property offers a mix of studios and one and twobedroom units averaging 886 square feet, and the unit interiors feature high ceilings, floor to ceiling windows, French balconies and stainless steel appliances. The property also features a swimming pool, cabana with fully-equipped kitchen, movie theater, recreation room, fitness center, sauna, tanning salon, lounge and a business center. Kennedy Wilson purchased Apex for $26.5 million in April 2014 and secured a seven-year, 50% LTV loan from Freddie Mac at Libor + 1.73%. The company plans to complete a $1.3 million renovation program to further enhance the property.

Apex Apex is a 203-unit apartment development built in 2008 and located in Tacoma, Washington. Just five minutes from downtown, Apex is set on one of the highest points in the area, offering scenic views of the city and Mt. Rainier.

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VALUE CREATION Kennedy Wilson has entitled or is in the process of entitling more than 3,000 residential units on land that it owns, with little to no basis, within or adjacent to existing income producing assets in the United States and in Europe.

State Street Site In 2014, Kennedy Wilson and its equity partner entered into a joint venture with NAMA to develop the land adjacent to the State Street Bank building, purchased by the company in 2014 and located in Dublin’s docklands. Planning permission was recently submitted for 313,000 square feet of net office space and 204 high quality residential units across seven blocks, including a 19 story tower. The project is expected to cost approximately $225 million and when completed in 2019, will be a standard bearer for mixed use development in Dublin. Key features include the flexible office design, unrivaled residential aspect set at the confluence of three water bodies and a 1.5 acre park.

Clancy Quay Clancy Quay is a high quality residential scheme consisting of 423 units in Dublin. Kennedy Wilson has secured permission to develop an additional 163 units including the conservation and refurbishment of nine historic army barracks and the construction of four new blocks. Construction is due to commence in May 2015. A final phase is currently being planned which will provide an additional 200 units and 30,000 square feet of commercial space. When completed in 2018, Clancy Quay will provide 800 units as part of a mixed use scheme.

Victory Plaza Kennedy Wilson acquired a loan secured by a 133,000 square foot grocery-anchored retail center along with an adjacent 2.4-acre residential land site in North Hollywood, California for approximately $30 million in December 2013 from NAMA. The company obtained title to the property shortly thereafter. The company is currently working with one of its existing joint venture partners to increase the value of the retail center through façade renovations, parking lot and landscape improvements and leasing up vacant space at market rents. The adjacent residential land is being re-entitled with plans for approximately 68 townhomes to be developed on the site. Kennedy Wilson has entered into negotiations to either sell the property or develop the property in a joint venture with a regional homebuilder. The estimated development cost is approximately $35 million and project completion is expected in 2017.

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Kohanaiki Kohanaiki is the first new development of its type on the Big Island of Hawaii in nearly a decade. The residential community and club are built around luxury, sustainability and world-class amenities. Situated on roughly 450 acres of land with over a mile and half of beachfront, at full build-out, the development will have over 400 homes. The property’s Rees Jones-designed 18-hole golf course winds over 100 acres and has been certified by the Audubon International Silver Signature Program, a testament to its careful design to protect wildlife, conserve water and preserve native vegetation. The Hales, luxury homes designed by award winning architects Shay Zak, Jim McLaughlin and Glazier Le Architects, consist of three and four-bedroom homes designed for indooroutdoor living. All 12 Shay Zak designed homes on the 9th fairway, 20 Hale Mai’a townhomes on the second level, as well as four McLaughlin homes will be completed by end of 2015. Construction has also begun on 16 Glazier Le designed Hale Alani homes along the 7th and 8th fairways, and construction of 12 additional townhomes along the 7th fairway will begin in 2015. With more than 65,000 square feet of recreational space and designed by renowned architect Shay Zak, The Clubhouse is scheduled for completion in winter 2015. A multi-level building, The Clubhouse will incorporate the open design and use of natural materials found in the Hale Club homes, also designed by Shay Zak. Features include a member shop, a 1,450-squarefoot spa, a state-of-the-art fitness center and swimming pool and a 120seat open air restaurant with panoramic ocean views, a spacious lanai and event lawn. The Clubhouse’s will also have a four-lane bowling alley, a 21-seat theatre with lobby and concession stand, arcade games, pool tables and shuffle board as well as an adults-only card and cigar lounge, private dining and wine tasting rooms and a gallery showcasing the works of acclaimed artists and authentic Hawai`i crafts. Kohanaiki currently has more than 100 members since opening in March 2013 and residential sales projected for 2015 to 2019 are estimated at over $800 million.

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SERVICES

PROPERTY SERVICES AND RESEARCH

Kennedy Wilson offers a comprehensive line of real estate services for the full lifecycle of real estate ownership to clients that include shareholders, financial institutions, institutional investors, insurance companies, developers, builders and government agencies.

Property Management In 2014, Kennedy Wilson expanded its Services platform, which targets financial institutions, to provide all aspects of facilities management, REO management and disposition, trust property management, capital improvement oversight and lease management, administration and renewals. The company also provides strategic planning for acquisitions, budgeting, forecasting, financial reporting, audit preparation and representation for internal and FDIC mandated compliance audits. One notable new property management assignment in 2014 was for 555 Montgomery, located in the heart of San Francisco’s financial district. East West Bank awarded management of the Class A, highrise office building to Kennedy Wilson in July 2014. Built in 1984, the 261,839-square-foot structure features floor-to-ceiling windows that showcase views of the city and the bay. The 18-story tower offers office spaces ranging in size from 1,200 square feet to 14,000 square feet, as well as 24-hour on-site security services.

Auction Since 1977, Kennedy Wilson has provided innovative disposition strategies to financial institutions by developing comprehensive marketing programs, attracting qualified buyers, accelerating the sales cycle and maximizing prices while providing exceptional transactional services and analysis. Property types include office, retail, industrial, single family, multifamily and land. In August 2014, Kennedy Wilson represented a financial institution in the sale of an underperforming hotel near Texas A&M University. This 118-room two-story hotel was constructed in 1964 and previously operated as a Travelodge and subsequently as student housing. The hotel was then bank owned for three years and during this period, it operated at a loss while no offer to buy the hotel exceeded $1.5 million. At the time of the offering, approximately 30% of the rooms were dark due to deferred maintenance. Kennedy Wilson conducted an auction marketing campaign and live auction generating substantial bidding activity. As a result, the hotel sold for $2.1 million.

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555 MONTGOMERY IN SAN FRANCISCO, CA

Brokerage Kennedy Wilson provides market intelligence, operational expertise and

Zonda

financial analysis to its institutional and private capital clients, assisting

Zonda™, a Meyers Research – Kennedy Wilson

them in maximizing the value of their real estate assets and reducing

innovation, is the housing industry’s most com-

operating costs.

prehensive research app with real-time market

In September 2014, Kennedy Wilson presented a value analysis of a 64,000 square-foot, waterfront retail property located in Oxnard, California. Anticipating an REO transaction, the lender engaged Kennedy

data reporting, land listings, new home projects, and easy to use tools, all in one place for those on-the-go.

Wilson to dispose of the asset. Kennedy Wilson prepared all marketing

Since its launch in October 2013, Zonda has

and due diligence materials in advance of the foreclosure and executed

pushed eight major version releases providing im-

a successful go-to-market strategy. The property was sold to a qualified

proved functionality and data in the most innova-

buyer who released hard money upon signing a purchase and sale

tive research app for the new home industry. Key

agreement and closed within two weeks, all cash, at $19 million – a price

changes include expanding Zonda’s geographic

that exceeded the lender’s initial valuation.

footprint to cover a total of 365 counties and 50 major metropolitan areas, comprehensive school

Meyers Research

test scores and detailed parcel information. With

Meyers Research, a Kennedy Wilson Company, is a premier consulting

housing statistics are more accessible than ever

practice and the industry’s leading provider of data and analytics for

and easy to explore.

residential real estate development and new home construction. The

The most notable achievement to date for

company offers a national perspective as well as local expertise to

Zonda was the release of the Project Report,

homebuilders, multifamily developers, lenders and financial institutions.

which features a proprietary dataset that tracks

In 2014, Meyers Research began work on a number of analyses for a

active, upcoming, and sold out new home sub-

financial institution related to its due diligence in funding the land banking of

divisions. The company’s in-house development

residential lots in markets across the United States. The primary objective

team created a custom platform that now allows

was to consider builder revenue and sales absorption inputs and then test

for cross collaboration between the research

them against actively selling new home comparables. The analyses also

and advisory teams. Monthly sales and price

include MSA housing and employment growth as well as insight on local

activity each are updated on a daily basis with

environments such as schools, retail and proximity to employment.

the company now tracking over 20,000 proj-

these new features, economic, demographic and

ects throughout the United States. The more Meyers Research has completed more than 20 of these assignments since last year and continues with these assignments in 2015. Some of the regions covered include California, Arizona, Texas, Georgia, Florida, North Carolina, Virginia, Minnesota and Illinois.

than 130 accounts that subscribe to the product (1,300 unique Zonda users) are thrilled with the latest improvements as they can better understand local housing dynamics with customizable price graphs and maps.

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SERVICES INVESTMENT MANAGEMENT Through its investment management platform, Kennedy Wilson manages $5.2 billion of invested equity capital in a $9.1 billion portfolio of assets on behalf of public shareholders, financial institutions, foundations, endowments, high net worth individuals and other institutional investors. The investment vehicles that we utilize in this platform

STADIUM GATEWAY IN ANAHEIM, CA

include publicly listed vehicles, separate accounts, joint ventures and co-mingled funds. In 2014, we launched the $2.2 billion IPO and follow-on offering of Kennedy Wilson Europe Real Estate Plc (LSE:KWE). An affiliate of Kennedy Wilson serves as the investment manager of KWE along with holding a 16.1% (1) ownership stake in the company. Our global investment management teams operate out of the regions in which they invest, allowing Kennedy Wilson to maintain a local presence and develop relationships with local financial institutions. The company has established a distinct competitive advantage in sourcing opportunistic investment ideas by leveraging the global presence and resources encompassed within our investment management platform. We exhibit strong conviction in our investment decisions by investing alongside our partners as we hold an approximate 32% average stake in these investment vehicles. (1)

As of April 24, 2015 See page 108 for certain definitions and reconciliations to the most directly comparable GAAP measures.

THE OAKS IN WEST VILLAGE, CA

TRI CENTER PLAZA IN VAN NUYS, CA

F I N A N C I A L

2014

R E P O R T

TABLE OF CONTENTS

Business

23

Selected Financial Data

30

Management’s Discussion and Analysis of Financial Condition and Results of Operations

31

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52

Reports of Independent Registered Public Accounting Firm

54

Consolidated Balance Sheets

56

Consolidated Statements of Operations

57

Consolidated Statements of Comprehensive Income

58

Consolidated Statements of Equity

59

Consolidated Statements of Cash Flows

61

Notes to Consolidated Financial Statements

64

Performance Graph

102

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

103

-VY^HYK3VVRPUN:[H[LTLU[Z*LY[HPU+LÄUP[PVUZHUK9LJVUJPSPH[PVUZ

104

BUSINESS COMPANY OVERVIEW

equal to 1% of KWE’s adjusted net asset value (reported by KWE to be $2.1

Kennedy Wilson is a vertically integrated global real estate investment and ser-

billion at December 31, 2014) and certain performance fees. The manage-

vices company with over $18.1 billion in assets under management. Founded

ment fee payable to KWE Manager is paid half in cash and half in shares of

in 1977, we have owned and operated real estate related investments for over

KWE. We are also entitled to receive an annual performance fee equal to 20%

37 years on behalf of our shareholders and our clients. We have over 450

of the lesser of (i) the excess of the shareholder return for the relevant year

employees in 25 offices throughout the United States, the United Kingdom,

(defined as the change in KWE’s adjusted net asset value per ordinary share

Ireland, Jersey, Spain and Japan and manage and work with over 4,000 op-

plus dividends paid) over a 10% annual return hurdle, and (ii) the excess

erating associates. We focus on adding value for our shareholders through

of year-end adjusted net asset value per ordinary share over a “high water

sourcing global opportunistic investment opportunities. Also, our services busi-

mark.” The performance fee is payable in shares of KWE that vest equally

ness creates additional value through fee generation and strategic investment

over a three-year period. No such fee has been earned by Kennedy Wilson as

management.

of December 31, 2014.

The following is our business model: s Identify countries and markets with an attractive investment landscape s Establish operating platforms and service businesses in our target markets

As of December 31, 2014, Kennedy Wilson owns approximately 20.2 million ordinary shares of KWE (with a cost basis of $333.8 million) or approximately 14.9% of the total issued share capital of KWE. Due to the terms of the investment management agreement and Kennedy

s Develop local intelligence and create long-lasting relationships; primarily with financial institutions

Wilson’s equity ownership interest in KWE, pursuant to the guidance set

s Leverage relationships and local knowledge to drive proprietary investment opportunities with a focus on off-market transactions

tion (“Subtopic 810”), the results and financial position of KWE are consol-

s Acquire high quality assets, either on our own or with strategic partners, utilizing cash from our balance sheet and typically financing them on a

are eliminated in the attached consolidated financial statements. Pursuant

long-term basis s Reposition assets and enhance cash flows post-acquisition s Continuously evaluate and selectively harvest asset and entity value

forth in FASB Accounting Standards Codification Subtopic 810 - Consolidaidated in our financial statements. As such, fees earned by KWE Manager to the investment management agreement, subject to certain exceptions, KWE will be provided priority access to all real estate or real estate loan opportunities sourced by us in Europe that are within the parameters of KWE’s investment policy.

through strategic realizations utilizing both the public and private markets

Since going public on November 13, 2009 through December 31, 2014,

s Utilize our services businesses to meet client needs, strengthen relationships with financial institutions, and position the Company as a valu-

the annualized total rate of return (including dividends) of our common stock

able resource and partner to these institutions for any future real estate

13.8%. Past stock price performance is not necessarily indicative of future

opportunities

stock price performance.

(NYSE: KW) was 24.3%, compared to the return of the S&P 500 index of

Our strategy has resulted in a strong track record of creating both asset and entity value for the benefit of our shareholders and partners over various real

RECENT DEVELOPMENTS

estate cycles.

In January 2015, Kennedy Wilson entered into a purchase agreement with a

Kennedy Wilson Europe Real Estate plc, or KWE (LSE: KWE), closed its

wholly-owned subsidiary of Winthrop Realty Trust to acquire a 61.5% inter-

initial public offering in February 2014 and a follow-on offering in October

est in Vintage Housing Holdings, LLC (“VHH”) for approximately $86 million.

2014, raising approximately $2.2 billion in gross proceeds. KWE, whose

VHH owns certain interests in 30 multi-family properties totaling 5,485 units,

ordinary shares are listed on the London Stock Exchange’s main market

which have been capitalized using tax credit financing. Upon the closing of

and is a member of the FTSE 250 Index, acquires real estate and real

the transaction, the property developer and current manager of VHH will own

estate-related assets in Europe. Since its inception through December 31,

the remaining 38.5% of the equity interests and maintain its role as manager.

2014, KWE has acquired 82 direct real estate assets with approximately

Including the assumption of approximately $328 million of property debt, along

6.6 million square feet and five loan portfolios totaling $2.4 billion in pur-

with third party equity interests and unrestricted cash, the Company’s purchase

chase price.

values the 30 property portfolio at approximately $486 million. The closing of

KWE is externally managed by one of our wholly-owned subsidiaries (“KWE Manager”) pursuant to an investment management agreement in which we

the acquisition is expected to be consummated in the first half of 2015, subject to customary closing conditions.

will be entitled to receive certain management and performance fees. KWE

In February 2015, KWE closed the acquisition of 163 of 180 mixed-use

Manager is paid an annual management fee (payable quarterly in arrears)

properties located throughout the United Kingdom for a purchase price of

P A G E

2 3

BUSINESS

(continued)

£443.6 million or approximately $670 million. The closing of the balance of

Commercial—We source, acquire, and finance various types of commercial

the portfolio under contract (17 properties for a total of £59.4 million or ap-

real estate which includes office, industrial, retail, and mixed-use assets. After

proximately $89 million) is scheduled to take place on a staggered basis during

acquisition, the properties are generally repositioned to enhance market value.

the next 12 months as various conditions under the purchase agreement are

Assets are either sold as part of property-specific investment strategies de-

satisfied.

signed to deliver above-market returns to our clients and shareholders or held

On February 25, 2015 our board of directors approved a $0.12 per share

if producing above average returns. As of December 31, 2014, we own inter-

quarterly dividend, a 33% increase from the previous quarter, to common

ests in 127 commercial properties, totaling over 14 million square feet, located

shareholders of record as of March 31, 2015 with a payment date of April

throughout the United States, United Kingdom, Ireland, and Japan.

8, 2015. The quarterly payment equates to an annual dividend of $0.48 per common share.

Loan Originations/Discounted Loan Purchases—We acquire and/or originate loans secured by real estate. Our acquisitions and originations include

BUSINESS SEGMENTS

individual notes on all real estate property types as well as portfolios of loans

Our operations are defined by two core business units: KW Investments

purchased from financial institutions, corporations and government agencies.

and KW Services. KW Investments invests our capital in real estate-re-

We deliver value through loan resolutions, discounted payoffs, and sales. We

lated assets. KW Services provides a full array of real estate-related ser-

also convert certain loans into a direct ownership in the underlying real estate

vices to the Company and its investment partners, third party owners, and

collateral. Our discounted loan pool portfolio as of December 31, 2014 had

lenders, with a strong focus on financial institution based clients. Included

current unpaid principal balance (“UPB”) of $1.1 billion. Also, as of December

in KW services is our management of KWE. The two segments have a

31, 2014, our loan originations portfolio has an unpaid principal balance of

symbiotic relationship and work closely together. KW Services provides

$48.7 million with a weighted average interest rate of 10.1%.

insight and creates investment opportunities for KW Investments while

Our loan investment portfolio is principally related to loans acquired at a

KW Investments provides clients the ability to utilize the capabilities of

discount from their contractual balance due as a result of deteriorated credit

KW Services.

quality of the borrower. Such loans are underwritten by us based on the value of the underlying real estate collateral. Due to the discounted purchase price,

KW Investments

we seek and are generally able to accomplish near term realization of the loan

We invest our capital in real estate assets and loans secured by real estate

in a cash settlement or by obtaining title to the property. Accordingly, the credit

either on our own or with strategic partners through publicly traded companies,

quality of the borrower is not of substantial importance to our evaluation of the

joint ventures, separate accounts, or funds. We are typically the general partner

risk of recovery from the investment.

in these joint ventures with a promoted interest in the profits of our investments beyond our ownership percentage. The Company has an average ownership

Hotel, Residential and Other—We also invest in hotels. In certain cases,

interest across all investments of approximately 32% as of December 31,

we may pursue residential for sale housing acquisition opportunities, including

2014. Our equity partners include public shareholders, financial institutions,

land for entitlements, finished lots, urban infill condominium sites and partial-

foundations, endowments, high net worth individuals and other institutional

ly finished and finished condominium projects. We also invest in marketable

and investors.

securities, which are typically real-estate related. We hold investments in over

The following are product types we invest in through the KW Investments

4200 acres, 177 residential units, 619 lots and 975 hotel rooms. While our core investments have been in the specific markets and loca-

segment:

tions listed above, we will evaluate opportunities to earn above market returns Multifamily—We pursue multifamily acquisition opportunities where we be-

across many other segments and geographic locations.

lieve we can unlock value through a myriad of strategies, including institutional management, asset rehabilitation, repositioning and creative recapitalization.

INVESTMENT ACCOUNT

We focus primarily on apartments in supply-constrained, infill markets. As of

In 2014, together with our equity partners, we acquired $3.2 billion of real

December 31, 2014, we hold investments in 20,721 multifamily apartment

estate and loans secured by real estate at purchase price. These acquisitions

units across 105 properties primarily located in the Western United States,

were comprised of the following: 58% commercial, 22% multifamily, 11%

Ireland and Japan.

loans secured by real estate and 9% other.

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At December 31, 2014, we and our equity partners held a real estate and real estate related investment portfolio with assets at a book value of approximately $9.1 billion, with approximately 45% leverage. The Company has an average ownership interest across all of its investments of approximately 32% as of December 31, 2014. The following table depicts how our equity in the portfolio is derived from the financial statement captions in our audited consolidated balance sheet as of December 31, 2014: December 31, 2014

(dollars in millions)

December 31, 2013

Real estate and acquired in-place lease values, gross of accumulated depreciation and amortization of $121.8 and $26.3, respectively

$4,349.9

$ 714.4

Loans Investment debt Cash held by consolidated investments Unconsolidated investments(1), gross of accumulated depreciation and amortization of $69.4 and $106.0, respectively

313.4 (2,195.9) 763.1 532.7

56.8 (401.8) 8.0 865.2

Other(2) Consolidated investment account Less: Noncontrolling interests on investments, gross of depreciation and amortization of $50.6 and $4.5, respectively Investment account

97.2

4.0

3,860.4

1,246.6

(2,193.4)

(55.1)

$1,667.0

$1,191.5

(1) Excludes $28.9 million and $26.9 million related to our investment in a servicing platform in Spain, as of December 31, 2014 and December 31, 2013, respectively. (2) Includes marketable securities, which are part of other assets, as well as net other assets of consolidated investments.

The following table breaks down our investment account information derived from the audited consolidated balance sheet, by investment type and geographic location as of December 31, 2014:

(dollars in millions)

Western U.S. Japan United Kingdom Ireland Subtotal

Commercial(1)

Multifamily(2)

Loans Secured by Real Estate(3)

$ 229.1 3.6 186.3

$411.2 78.1 3.4

$ 75.2 — 41.7

64.1

69.5

30.1

$ 483.1

$562.2

$147.0

Residential, Hotel, and Other(4)

Total

$183.3 0.4 15.5

$ 898.8 82.1 246.9

123.3(6) $322.5

287.0 $1,514.8 152.2

KW share of cash held by consolidated investments(5)

$1,667.0

Total

(1) Includes the following with respect to our share of investments made and held directly by KWE (based on our 14.9% ownership interest in KWE): $102.1 million investment account balance related to 62 commercial properties in the United Kingdom; and $26.1 million investment account balance related to 14 commercial properties in Ireland. (2) Includes $7.9 million investment account balance related to 2 multifamily properties in Ireland from our share of investments made and held directly by KWE (based on our 14.9% ownership interest in KWE). (3) Includes the following with respect to our share of investments made and held directly by KWE (based on our 14.9% ownership interest in KWE): $25.9 million investment account balance related to two loan portfolios in the United Kingdom comprising 6 loans secured by 11 real estate assets with a current UPB of $275.5 million; and $21.7 million investment account balance related to two loan portfolios in Ireland comprising 15 loans secured by 18 real estate assets with a current UPB of $353.5 million. (4) Includes the following with respect to our share of investments made and held directly by KWE (based on our 14.9% ownership interests in KWE): $6.8 million investment account balance related to one hotel in the United Kingdom, $6.8 million investment account balance related to one hotel in Ireland and one acre of development land, and $1.0 million investment account balance related to a residential project in Spain. The hotel in the United Kingdom comprises of 520 acres and 209 hotel rooms and the hotel in Ireland comprises of 171 acres and 138 hotel rooms. (5) Includes $102.3 million in cash held directly by KWE (based on our 14.9% ownership interest in KWE). (6) Includes $1.0 million investment account balance related to a residential project in Spain.

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BUSINESS

(continued)

The following table breaks down our investment account information derived from the audited consolidated balance sheet, by investment type and geographic location as of December 31, 2013: Loans Secured by Real Estate

Residential and Other

Total

$150.9 0.4 —

$ 793.2 96.3 135.7

(dollars in millions)

Commercial

Multifamily

Western U.S. Japan United Kingdom

$252.0 4.5 108.4

$277.8 91.4

—

$112.5 — 27.3

Ireland

102.1

51.4

8.3

—

161.8

Subtotal

$467.0

$420.6

$148.1

$151.3

$1,187.0

KW share of cash held by consolidated investments

4.5 $1,191.5

Total

KW Services

Property Services—Our property services division manages commercial real

KW Services offers a comprehensive line of real estate services for the full

estate for third-party clients, fund investors, and investments held by Kenne-

lifecycle of real estate ownership to clients that include shareholders of KWE,

dy Wilson. In addition to earning property management fees, consulting fees,

financial institutions, institutional investors, insurance companies, developers,

leasing commissions, construction management fees, disposition fees, and

builders and government agencies. KW Services has five main lines of busi-

accounting fees, the property services division gives Kennedy Wilson insight

ness: investment management, property services, research, brokerage, and

into local markets and potential acquisitions. Leveraging over 37 years of real

auction and conventional sales. These five business lines generate revenue for

estate experience, we approach property management from the perspective of

us through fees and commissions.

an owner and are active in identifying and implementing value creation strate-

We manage over 71 million square feet of properties for the Company and its investment partners (including KWE) in the United States, Europe, and Asia, which includes assets we have ownership interests in and third party owned assets. With 25 offices throughout the United States, the United Kingdom, Ireland, Jersey, Spain and Japan, we have the capabilities and resources to provide property services to real estate owners as well as the experience, as a real estate investor, to understand client concerns. The managers of KW Services have an extensive track record in their respective lines of business and in the real estate community as a whole. Their knowledge and relationships are an excellent driver of businesses through the services business as well as on the investment front. Additionally, KW Services plays a critical role in supporting our investment strategy by providing local market intelligence and real-time data for evaluating investments, generating proprietary transaction flow and creating value through efficient implementation of asset management or repositioning strategies. Investment Management—Our investment management division, provides acquisition, asset management and disposition services to our equity partners as well as to third parties. Currently, we have seven closed end funds for which we serve as general partner and manager and separate accounts with strategic partners. In addition, we serve as the manager of KWE and are entitled to receive management fees (50% of which are paid in KWE shares) equal to 1% of KWE’s adjusted net asset value (reported by KWE to be $2.1 billion at December 31, 2014) and certain performance fees. Under US GAAP, we are required to consolidate the results of KWE and as such fees earned from KWE are eliminated in consolidation.

K E N N E D Y - W I L S O N

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gies. The division has a proven track record of success in managing stabilized as well as value-add investments. Research—Meyers Research LLC or Meyers, a wholly-owned subsidiary of Kennedy Wilson, is a premier consulting practice and provider of data for residential real estate development and new home construction. Meyers’ offers a national perspective as well as local expertise to homebuilders, multifamily developers, lenders and financial institutions. These relationships have led to investment opportunities with homebuilders in the Western U.S. region. We believe Zonda™, a Meyers innovation launched in October 2013, is the housing industry’s most comprehensive solution for smart business analysis, real-time market data reporting and economic and housing data in one place and onthe-go. Brokerage—Our brokerage division represents tenants and landlords on every aspect of site selection, negotiation and occupancy. The division also specializes in innovative marketing programs tailored to client objectives for all types of investment grade and income producing real estate. The division’s property marketing programs combine proven techniques with its detailed market knowledge to create optimum results.

sion provides innovative marketing and sales strategies for all types of com-

s We understand that real estate is cyclical. Our management team employs a multi-cyclical approach that has resulted in our AUM being glob-

mercial and residential real estate, including single family homes, mixed-use

ally diversified across many sectors of real estate while maintaining a

developments, estate homes, multifamily dwellings, new home projects, and

healthy liquidity position and adequate access to capital.

Auction and Conventional Sales—The auction and conventional sales divi-

conversions. Generally the division’s auction sales business is countercyclical to the traditional sales real estate market and has been a bellwether for us in

INDUSTRY OVERVIEW

forecasting market conditions.

United States The U.S. economy continued to gain momentum in 2014 as equity and real

VALUE CREATION

estate prices continued their upward trend. Robust employment growth and

Kennedy Wilson’s differentiated and unique approach to investing is the cor-

continued underlying strength in the broader economy allowed the Federal

nerstone of how we create value for our shareholders. Our investment philoso-

Reserve to wind down its massive bond buying purchase program during

phy is based on three core fundamentals:

2014, which started in the wake of the 2008 financial crisis. Low interest rates

s Leverage our global footprint and complementary investments and services businesses to identify attractive investment markets across the world.

continued to force investors into riskier assets and U.S. real estate returns,

s Selectively invest in opportunities across many real estate product types with a goal of maximizing cash flow and return on capital.

since 2006.

s Actively manage assets and finance them conservatively to generate stable, predictable and growing cash flows for shareholders and clients.

a strengthening economy and low borrowing costs. The improving economic

Kennedy Wilson is able to create value for its shareholders in the

cancy rates continued to fall across commercial properties and due to higher

following ways: s We are able to identify and acquire attractive real estate assets across many markets, in part due to the significant proprietary deal flow driven

as measured by the FTSE NAREIT 50 Index, posted their largest annual gain U.S. real estate market conditions remained favorable in 2014 marked by landscape led to strengthening fundamentals across all property types. Varesidential home prices, renter demand for apartments continued to expand at a steady pace. Looking ahead, we believe the prospect of higher asset values and cash

from an established global network of industry relationships, particularly

flows in an improving economy with continued job growth outweigh the risks

with financial institutions. This can create value by allowing us to main-

of higher short term U.S. treasury rates in 2015. Furthermore, we believe that

tain and develop a large pipeline of attractive opportunities.

continued growth in the U.S. economy will once again drive improvements

s Our operating expertise allows us to focus on opportunistic investments where we can increase the value of assets and cash flows, such as dis-

in fundamentals for all real estate types, including the prospects of higher occupancies, rent growth, property values, and increases in capital availability.

tressed real estate owners or lenders seeking liquidity, under-managed or under-leased assets, and repositioning opportunities.

Europe

s Many times, these investments are acquired at a discount to replacement cost or recent comparative sales, thereby offering opportunities

While the U.S economy showed signs of strength, the European market con-

to achieve above average total returns. In many cases this may lead to

European countries appear to be at or have moved past their cyclical “trough.”

significant additional returns, such as a promoted interest, based on the

Against this backdrop of improving market sentiment and positive signals from

performance of the assets.

leading indicators, commercial real estate investment activity has continued

tinued to show signs of improving confidence and market sentiment. Many

s In many instances, our long-lasting and deep relationships with financial institutions allow us to refinance loans to reduce interest rates and/or in-

to increase, driven by strong cross-regional capital flows into the direct in-

crease borrowings due to property appreciation and thereby obtain cash

improvement in the underlying economic fundamentals of Europe will result in

flow to use for new investments. We generally implement this strategy

a favorable investment outlook for European commercial real estate.

vestment market and improved availability of debt. We believe that continued

after our value add initiatives have been executed, thus allowing us to maintain moderate levels of leverage. s KW Services plays a critical role in supporting our investment strategy by providing local market intelligence and real-time data for evaluating investments, generating proprietary transaction flow and creating value through efficient implementation of asset management or repositioning strategies.

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BUSINESS

(continued)

United Kingdom

nies that invest in real estate and loans secured by real estate along with bro-

Since mid-2003, the U.K. recovery has become more established as investor

kerage and property management companies as well as companies that invest

sentiment has strengthened. London continues to be an attractive real estate

in real estate and loans secured by real estate. Our investment business com-

market due to foreign capital investment and a strong global presence. Much

petes with real estate investment partnerships, real estate investments trusts,

of the foreign capital has targeted the London location, causing a polarization

private equity firms and other investment companies and regional investors

(in terms of pricing and levels of activity) between London and the rest of the

and developers. We believe that our relationships with the sellers and our ability

country. Though vacancy rates may have dropped and the U.K.’s economic

to close an investment transaction in a short time period at competitive pricing

recovery remains fragile, forecasts of GDP growth for 2015 are encouraging.

provide us a competitive advantage. The real estate services business is both highly fragmented and competitive. We compete with real estate brokerage

Ireland

and auction companies on the basis of our relationship with property owners,

The Irish economy continues to expand with upward revisions in performance

quality of service, and commissions charged. We compete with property man-

outputs. Irish GDP is expected to grow by more than 3.5% this year, and Ire-

agement and leasing firms also on the basis of our relationship with clients,

land is expected to be one of the fastest growing EU countries. Transaction

the range and quality of services provided, and fees and commissions charged.

volumes and property value improvements exceeded all expectations over the last 12 months. The office market benefited from a material uptick in occupier

COMPETITIVE STRENGTHS

demand, and the apartment sector continues to experience growth driven by

We have a unique platform from which to execute our investment and services

strong demographics and limited new supply. With the continued deleveraging

strategy. The combination of a service business and an investment platform

from NAMA and other financial institutions, we believe 2015 will be another

provides several competitive strengths when compared to other real estate

busy year for the Irish property market.

buyers operating stand-alone or investment-focused firms and may allow us

Spain

to generate superior risk-adjusted returns. Our investment strategy focuses

Spain’s economic growth continues unabated from 2013. Whilst GDP remains below pre-recession peak, it has the potential to be one of the fastest growing economies in Europe over the coming years. Improved employment forecasts would boost consumer confidence and subsequently drive rental growth. Assets are still being offloaded by SAREB, the bad bank of the Spanish government, and other financial institutions. We believe the real estate market for Spain will be attractive due to continued low interest rates, an improving economic backdrop, and increased investor appetite from both individual and institutional investors.

on investments that offer significant appreciation potential through intensive property management, leasing, repositioning, redevelopment and the opportunistic use of capital. We differentiate ourselves from other firms in the industry with our full service, investment oriented structure. Whereas most other firms use an investment platform to obtain additional service business revenue, we use our service platform to enhance the investment process and ensure the alignment of interests with our investors. Our competitive strengths include: s Transaction Experience: Our Executive Committee has more than 125 years of combined real estate experience and has been working and

Japan

investing together on average for over 15 years. Members of the Exec-

The economic stimulus program in Japan instituted by Prime Minister Abe

utive Committee have collectively acquired, developed and managed in

has led to a weakening of the Japanese yen against most major currencies

excess of $20 billion of real estate investments in the United States, the

and continues to create a tailwind for asset prices. The prospect of hosting

United Kingdom, Ireland, Spain and Japan throughout various economic

the 2020 Summer Olympics has strengthened corporate demand in Tokyo.

cycles, both at our Company and throughout their careers.

In addition, capital continues to flow into the country from a variety of investment sources, both domestic and international. We believe that there will be

s Extensive Relationship and Sourcing Network: We leverage our services business in order to source off-market deals. In addition, the Executive

a continued interest in the Japanese real estate market due to its attractive

Committee and our acquisition team have transacted deals in nearly ev-

exchange rate and low interest rates.

ery major metropolitan market on the West Coast of the United States,

COMPETITION We compete with a range of global, national and local real estate firms, individual investors and other corporations, both private and public. Because of our unique mix of investments and services businesses, we compete with compa-

P A G E

2 8

as well as in the United Kingdom, Ireland, Spain and Japan. Their local presence and reputation in these markets have enabled them to cultivate key relationships with major holders of property inventory, in particularly financial institutions, throughout the real estate community.

s Structuring Expertise and Speed of Execution: Prior acquisitions completed by us have taken a variety of forms including direct property

TRANSACTION-BASED RESULTS A significant portion of our cash flow is tied to transaction activity which can

investments, joint ventures, exchanges involving stock or operating part-

affect an investor’s ability to compare our financial condition and results of op-

nership units, participating loans and investments in performing and non-

erations on a quarter-by-quarter basis or to easily evaluate the breadth of our

performing mortgages at various capital stack positions with the objective

operation. Historically, this variability has caused our revenue, operating income,

of long-term ownership. We believe we have developed a reputation of

net income and cash flows to be tied to transaction activity, which is not nec-

being able to quickly execute, as well as originate and creatively structure

essarily concentrated in any one quarter. In addition, our operating results can

acquisitions, dispositions and financing transactions.

be affected by acquisition-related gains, which often can cause concentrated

s Vertically integrated platform for operational enhancement: We have over 450 employees in both KW Investments and KW Services, with 25 regional offices throughout the United States, the United Kingdom, Ireland, Spain, Jersey and Japan and manage and oversee over 4,000 operating

gain recognition in particular periods. While acquisition related gains can have a material result on our net income, because it arises from remeasurement of asset value, it does not affect operating income or cash flow.

associates. We have a hands-on approach to real estate investing and

EMPLOYEES

possess the local expertise in property management, leasing, construc-

As of December 31, 2014, we have over 450 employees in 25 offices through-

tion management, development and investment sales, which we believe

out the United States, the United Kingdom, Ireland, Spain, Jersey and Japan

enable us to invest successfully in selected submarkets.

and manage and oversee over 4,000 operating associates. We believe that we

s Risk Protection and Investment Discipline: We underwrite our investments based upon a thorough examination of property economics and a critical understanding of market dynamics and risk management strat-

have been able to attract and maintain high quality employees. There are no employees subject to collective bargaining agreements. In addition, we believe we have a good relationship with our employees.

egies. We conduct an in-depth sensitivity analysis on each of our ac-

AVAILABLE INFORMATION

quisitions. This analysis applies various economic scenarios that include

Information about us is available on our website (http://www.kennedywilson.

changes to rental rates, absorption periods, operating expenses, interest

com) (this website address is not intended to function as a hyperlink, and the

rates, exit values and holding periods. We use this analysis to develop our

information contained in, or accessible from, our website is not intended to be

disciplined acquisition strategies.

a part of this filing). We make available on our website, free of charge, copies

FOREIGN CURRENCY Approximately 45% of our investment account is invested through our foreign platforms in their local currencies. Investment level debt is generally incurred in local currencies and we consider our equity investment as the appropriate exposure to evaluate for hedging purposes. Fluctuations in foreign exchanges rates may have a significant impact on the results of our operations. In order to manage the effect of these fluctuations, we generally hedge our book equity exposure to foreign currencies through currency forward contracts and options. We typically hedge 50%-100% of book equity exposure against these foreign currencies.

of our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, Proxy Statements on Schedule 14A and amendments to those reports and other statements filed or furnished pursuant to Section 13(a), 14 or 15(d) of the Securities Exchange Act of 1934, as amended, as soon as reasonably practicable after filing or submitting such material electronically or otherwise furnishing it to the SEC. In addition, we have previously filed registration statements and other documents with the SEC. Any document we file may be inspected, without charge, at the SEC’s public reference room at 100 F Street NE, Washington, D.C. 20549 or at the SEC’s internet address at http://www.sec.gov (this website address is not intended to function as a hyperlink, and the information contained in, or accessible from, the SEC’s website is not intended to be a part of this filing). Information related to the operation of the SEC’s public reference room may be obtained by calling the SEC at 1-800-SEC-0330.

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SELECTED FINANCIAL DATA

The following tables summarize our selected historical consolidated financial information. This information was derived from our audited financial statements for each of the years ended December 31, 2014, 2013, 2012, 2011 and 2010. This information is only a summary. You should read this information together in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the financial statements and related notes included elsewhere in this document. Year Ended December 31, 2014

(dollars in millions, except per share amounts)

Statements of operations data and dividends: Revenue Net Income Basic income (loss) per share Dividends declared per share of common stock Consolidated EBITDA(1) Consolidated EBITDA annual increase Adjusted EBITDA(1) Adjusted EBITDA annual increase

$ 398.6 90.1 0.14 0.36 440.3 148% 317.8 100%

2013

2012

2011

2010

$ 123.1 13.9 (0.21) 0.28 177.6 93% 159.1 63%

$ 66.9 6.7 (0.07) 0.20 92.1 39% 97.4 39%

$ 62.6 7.1 (0.06) 0.11 66.2 38% 70.3 27%

$ 50.5 6.5 (0.03) — 48.1 55.4

As of December 31, 2014 Balance sheet data: Cash and cash equivalents Total assets Investment debt Unsecured corporate debt Kennedy Wilson equity Noncontrolling interests Total equity Investment account

937.7 6,332.1 2,195.9 827.4 901.1 2,142.8 3,043.9 1,667.0

2013

178.2 1,798.8 401.8 449.0 768.3 50.6 818.9 1,191.5

40%

Investment account annual increase

31%

2012

120.9 1,283.8 236.5 449.6 509.7 9.1 518.8 908.9 56%

2011

115.9 792.8 30.7 289.4 410.2 3.4 413.6 582.8

2010

47.0 487.8 60.0 67.8 300.2 12.7 312.9 363.7

60%

(1) See “Management’s Discussion and Analysis of Financial Condition and Results of Operations-Non-GAAP measures” and “Results of Operations” for a description of Consolidated EBITDA and Adjusted EBITDA and a reconciliation of these metrics to net income as reported under GAAP.

Due to our significant acquisition activity, the periods presented above may not be comparable. See Note 4 in our Notes to the Consolidated Financial Statements for discussion of the business combinations that occurred during the years ended December 31, 2014 and 2013.

K E N N E D Y - W I L S O N

H O L D I N G S ,

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis should be read in conjunction with

Loan Originations/Discounted Loan Purchases

the financial statements and related notes and the other financial infor-

We originate and/or acquire loans secured by real estate. Our originations

mation appearing elsewhere in this report. This discussion and analysis

and acquisitions include individual notes on all real estate property types

contains forward-looking statements that involve risks, uncertainties and

as well as portfolios of loans purchased from financial institutions, corpora-

assumptions. See the section title “Forward-Looking Statements” for more

tions and government agencies. Our loan investment portfolio is principally

information. Actual results could differ materially from those anticipated in

related to loans acquired at a discount from their contractual balance due

the forward-looking statements as a result of many factors, including those

as a result of deteriorated credit quality of the borrower. Such loans are

discussed in “Risk Factors” on page 9 and elsewhere in this report.

underwritten by us based on the value of the underlying real estate collat-

Unless specifically noted otherwise, as used throughout this Management’s

eral. Due to the discounted purchase price, we seek and are generally able

Discussion and Analysis section, “we,” “our,” “us,” “the Company” or “Kennedy

to accomplish near term realization of the loan in a cash settlement or by

Wilson” refers to Kennedy-Wilson Holdings, Inc. and its wholly-owned subsid-

obtaining title to the property. Accordingly, the credit quality of the borrower

iaries. “KWE” refers to Kennedy Wilson Europe Real Estate plc, a London Stock

is not of substantial importance to our evaluation of the risk of recovery from

Exchange listed company that we externally manage through a wholly-owned

the investment.

subsidiary. “Equity partners” refers to the subsidiaries that we consolidate in

Residential, Hotel, and Other

our financial statements under U.S. GAAP (other than wholly-owned subsidiar-

In certain cases, we may pursue for sale housing acquisition opportunities,

ies), including KWE, and third-party equity providers. “KW Group” refers to the

including land for entitlements, finished lots, urban infill condominium site

Company and its subsidiaries that are consolidated in its financial statements

and partially finished and finished condominium projects. This group also

under U.S. GAAP (including KWE).

includes our investment in hotels and our investments in marketable se-

OVERVIEW Kennedy Wilson is a vertically integrated global real estate investment and services company. For over 37 years, we have owned and operated real estate related investments on behalf of our shareholders and our clients with offices in

curities. KW Services—our services business offers a comprehensive line of real estate services for the full lifecycle of real estate ownership. Below are the product types we offer through the KW services segment:

the United States, United Kingdom, Ireland, Jersey, Spain and Japan. Our operations are defined by two core business segments, KW Investments

Investment Management

and KW Services, which work closely together to identify attractive investment

We provide acquisition, asset management and disposition services to

markets and opportunities around the world:

our equity partners as well as to third parties. In addition, one of Kennedy Wilson’s wholly-owned subsidiaries (“KWE Manager”) is the external man-

KW Investments—we invest in various types of real estate investments through our investments business, either on our own or with strategic partners, where we are typically the general partner, with a promoted interest in the profits of the business beyond our ownership percentage. The main types of real estate we invest in are listed below:

ager of KWE pursuant to an investment management agreement in which capacity we are entitled to receive certain management and performance fees. KWE Manager is paid an annual management fee (payable quarterly in arrears) equal to 1% of KWE’s adjusted net asset value (reported by KWE to be $2.1 billion at December 31, 2014) and certain performance fees. The

Multifamily

management fee payable to KWE Manager is paid half in cash and half in

We focus primarily on apartments in supply-constrained, infill markets. We

shares of KWE. A wholly-owned subsidiary of Kennedy Wilson is also entitled

pursue multifamily acquisition opportunities where we can unlock value

to receive an annual performance fee equal to 20% of the lesser of the ex-

through a myriad of strategies, including institutional management, asset

cess of the shareholder return for the relevant year (defined as the change

rehabilitation, repositioning and creative recapitalization.

in KWE’s adjusted net asset value per ordinary share) over a 10% annual

Commercial

return hurdle, and the excess of year-end adjusted net asset value per or-

We source, acquire, and finance various types of commercial real estate that

dinary share over a “high water mark”. The performance fee is payable in

includes office, industrial, retail, and mixed-use assets.

shares of KWE that vest equally over a three-year period. No such fee has been earned by Kennedy Wilson as of December 31, 2014. Under US GAAP, we are required to consolidate the results of KWE and as such fees earned from KWE are eliminated in consolidation.

P A G E

3 1

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) Property Services

Loans and Other Income—Loans and other income is primarily composed of

This division manages commercial real estate for third-party clients, fund

interest income earned on the Company’s loan originations and investments in

investors, and investments held by the Company. In addition to earning

discounted loan purchases.

property management fees, consulting fees, lease commissions, construction management fees, disposition fees, and accounting fees, the property services group gives Kennedy Wilson insight into local markets and potential acquisitions.

Sale of Real Estate—sales of real estate consists of gross sales proceeds received on the sale of consolidated real estate that is not defined as a business by generally accepted accounting principles. This typically includes the sale of condominium units.

Research

Expenses

Meyers Research LLC (“Meyers”), a Kennedy Wilson company, is a premier

Commission and Marketing Expenses—commission and marketing expenses

consulting practice and the industry’s leading provider of data and analytics

includes fees paid to third party sales and leasing agents as well as business

for the residential real estate development and new home construction in-

development costs necessary to generate revenues.

dustry. Meyers’ proprietary iPad application, Zonda, launched in 2013 and provides market insight for the homebuilding industry with real-time data on

Rental and Hotel Operating Expenses—rental and hotel operating expenses

over 250 metrics impacting the housing market on a national and local level.

consists of operating expenses of our consolidated real estate investments, including items such as property taxes, insurance, maintenance and repairs,

Auction and Conventional Sales

utilities, supplies, salaries and management fees.

The auction and conventional sales group provides innovative marketing and sales strategies for all types of commercial and residential real estate,

Compensation and related expenses—compensation and related expenses

including single family homes, mixed-use developments, estate homes,

include: (a) employee compensation, comprising of salary, bonus, employer

multifamily dwellings, new home projects, conversions and scattered prop-

payroll taxes and benefits paid on behalf of employees and (b) share-based

erties.

compensation associated with the grants of share-based awards.

Brokerage

General and Administrative—general and administrative expenses represent

The brokerage group specializes in innovative marketing programs tailored

administrative costs necessary to run KW Group’s business and include things

to client objectives for all types of investment grade and income producing

such as occupancy and equipment expenses, professional fees, public com-

real estate.

pany costs, travel and related expenses, and communications and information services.

FINANCIAL MEASURES AND DESCRIPTIONS

Depreciation and Amortization—depreciation and amortization is comprised

Our key financial measures and indicators are discussed below. Please refer to

of depreciation expense which is recognized ratably over the useful life of an

the critical accounting policies in the Notes to the Consolidated Financial State-

asset and amortization expense which primarily consist of the amortization of

ments for additional detail regarding the GAAP recognition policies associated

assets allocated to the value of in-place leases upon acquisition of a consoli-

with the captions described below.

dated real estate asset or the amortization of loan fees.

Revenues

Non-Operating Income (Expense)

Investment Management, Property Services and Research Fees—Investment

Income from Unconsolidated Investments—Income from unconsolidated in-

management, property services, and research fees are primarily comprised of

vestments consists of (a) the Company’s share of income or loss earned on

base asset management fees, performance based fees, and acquisition fees

investments in which the Company can exercise significant influence but does

generated by our investment management division, property management fees

not have control, and (b) interest income from unconsolidated loan pool partic-

generated by our property services division, leasing fees and sales commis-

ipations. Additionally, interest income from loan pool participations are recog-

sions generated by our brokerage and auction divisions, and consulting fees

nized on a level yield basis, where a level yield model is utilized to determine

generated by Meyers.

a yield rate which, based upon projected future cash flows, accretes interest

Rental and Hotel Income—rental and hotel income is comprised of rental in-

income over the estimated holding period. See the unconsolidated investments

come earned by our consolidated real estate investments and hotel revenue

footnote of the attached notes to the consolidated financial statements for

earned by our consolidated hotels.

summarized financial data, including balance sheet and income statement information of the underlying investments.

P A G E

3 2

Acquisition-Related Gains—Acquisition-related gains consist of non-cash

Noncontrolling Interests—Noncontrolling interests represents income or loss

gains recognized by the Company upon a GAAP required fair value remea-

attributable to equity partners for their ownership in investments which the

surement due to a business combination. These gains are typically recognized

Company controls. Income or loss is attributed to noncontrolling interest part-

when the Company converts a loan into consolidated real estate owned and the

ners based on their respective ownership interest in an investment.

fair value of the underlying real estate exceeds the basis in the previously held loan. These gains also arise when there is a change of control of an existing investment. The gain amount is based upon the fair value of the Company’s equity in the investment in excess of the carrying amount of the equity directly preceding the change of control.

Accumulated other comprehensive income—Accumulated other comprehensive income represents the Company’s share of foreign currency movement on translating KW Group’s foreign subsidiaries from their functional currency into the Company’s reporting currency. These amounts are offset by KW Group’s effective portion of currency related hedge instruments. Unrealized changes in fair

Acquisition-Related Expenses—Acquisition-related expenses consists of the

value on the Company’s investment in marketable securities are also included

costs incurred to acquire assets, such as stamp duty taxes on foreign transac-

in this account.

tions, as well as the write off of any costs associated with acquisitions which did not materialize.

FOREIGN CURRENCY As of December 31, 2014, approximately 45% of our investment account is

Interest expense—corporate Debt—Interest expense - corporate debt represents interest costs associated with our senior notes payable, junior subordinated debentures and line of credit facility. This debt is unsecured and we typically use the funds generated from corporate borrowings to fund new investments.

invested through our foreign platforms in their local currencies. Investment level debt is generally incurred in local currencies and there we consider our equity investment as the appropriate exposure to evaluate for hedging purposes. Fluctuations in foreign exchanges rates may have a significant impact on the results of our operations. In order to manage the effect of these fluc-

Interest expense–investment—Interest expense-investment represents inter-

tuations, we generally hedge our book equity exposure to foreign currencies

est costs associated with mortgages on our consolidated real estate. These

through currency forward contracts and options. We typically hedge 50%-

mortgages are typically secured by the underlying real estate collateral.

100% of book equity exposure against these foreign currencies.

Other Income—Other income includes the realized foreign currency exchange

NON-GAAP MEASURES AND CERTAIN DEFINITIONS

income or loss relating to the settlement of foreign transactions during the year which arise due to changes in currency exchange rates, realized gains

EBITDA and Adjusted EBTIDA

or losses related to the settlement of derivative instruments, the gain or loss

Consolidated EBITDA(1)—Consolidated EBITDA represents net income before

on the sale of marketable securities, and other non-operating interest income.

interest expense, our share of interest expense included in income from invest-

Income Taxes—The Company’s services business operates globally as corpo-

ments in joint ventures and loan pool participations, depreciation and amor-

rate entities subject to federal, state, and local income taxes and the invest-

tization, our share of depreciation and amortization included in income from

ment business operates through various partnership structures to participate

investments in joint ventures, loss on early extinguishment of corporate debt

in multifamily, office and residential property acquisitions as well as originate

and income taxes. We do not adjust Consolidated EBITDA for gains or losses on

loans and purchases loan pools. The Company’s distributive share of income

the extinguishment of mortgage debt as we are in the business of purchasing

from its partnership investments will be subject to federal, state, and local

discounted notes secured by real estate and, in connection with these note

taxes at the entity level and the related tax provision attributable to the

purchases, we may resolve these loans through discounted payoffs with the

Company’s share of the income tax is reflected in the consolidated financial

borrowers. Our management believes Consolidated EBITDA is useful in evalu-

statements.

ating our operating performance compared to that of other companies in our industry because the calculation of Consolidated EBITDA generally eliminates the effects of financing and income taxes and the accounting effects of capital spending and acquisitions.

K E N N E D Y - W I L S O N

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) Adjusted EBITDA(1)—represents Consolidated EBITDA, as defined above,

(1)

Consolidated EBITDA, as defined above, is not a recognized term under

adjusted to exclude merger related compensation expenses, share based

GAAP and does not purport to be an alternative to net earnings as a mea-

compensation expense, and EBITDA attributable to noncontrolling interests.

sure of operating performance or to cash flows from operating activities as a

Our management uses Adjusted EBITDA to analyze our business because it

measure of liquidity. Additionally, Consolidated EBITDA is not intended to be a

adjusts EBITDA for items we believe do not accurately reflect the nature of our

measure of free cash flow available for management’s discretionary use, as

business going forward or that relate to non-cash compensation expense or

it does not remove all non-cash items (such as acquisition related gains) or

noncontrolling interests. Additionally, we believe Adjusted EBITDA is useful to

consider certain cash requirements such as interest payments, tax payments

investors to assist them in getting a more accurate picture of our results from

and debt service requirements. Our presentation of Consolidated EBITDA has

operations. Such items may vary for different companies for reasons unrelated

limitations as an analytical tool, and you should not consider it in isolation or as

to overall operating performance.

a substitute for analysis of our results as reported under GAAP. Consolidated

Adjusted Fees refers to Kennedy Wilson’s investment management, property services and research fees adjusted to include fees eliminated in consolidation and Kennedy Wilson’s share of fees in unconsolidated service businesses. Adjusted Net Asset Value is calculated by KWE as net asset value adjusted to

EBITDA is not calculated under GAAP and should not be considered in isolation or as a substitute for net income, cash flows or other financial data prepared in accordance with GAAP or as a measure of our overall profitability or liquidity. Such items may vary for different companies for reasons unrelated to overall operating performance.

include properties and other investment interests at fair value and to exclude

Adjusted EBITDA represents Consolidated EBITDA, as defined above, adjust-

certain items not expected to crystallize in a long-term investment property

ed to exclude corporate merger related compensation expenses, share based

business model such as the fair value of financial derivatives and deferred

compensation expense, and EBITDA attributable to noncontrolling interests.

taxes on property valuation surpluses.

Such items may vary for different companies for reasons unrelated to overall

Adjusted Net Income represents Consolidated Adjusted Net Income as defined

operating performance. However, Consolidated EBITDA and Adjusted EBITDA

below, adjusted to exclude net income attributable to noncontrolling interests,

are not recognized measurements under GAAP and when analyzing our op-

before depreciation and amortization.

erating performance, readers should use Consolidated EBITDA and Adjusted EBITDA in addition to, and not as an alternative for, net income as determined

Consolidated Adjusted Net Income represents net income before depreci-

in accordance with GAAP. Because not all companies use identical calcula-

ation and amortization, our share of depreciation and amortization included

tions, our presentation of Consolidated EBITDA and Adjusted EBITDA may not

in income from unconsolidated investments and share based compensation

be comparable to similarly titled measures of other companies. Furthermore,

expense.

Consolidated EBITDA and Adjusted EBITDA are not intended to be a measure of

Consolidated Investment Account refers to the sum of Kennedy Wilson’s equity in: cash held by consolidated investments, consolidated real estate and acquired in-place leases, unconsolidated investments and consolidated loans

free cash flow for our management’s discretionary use, as it does not remove all non-cash items (such as acquisition related gains) or consider certain cash requirements such as tax and debt service payments. The amounts shown for Consolidated EBITDA and Adjusted EBITDA also differ from the amounts

gross of accumulated depreciation and amortization.

calculated under similarly titled definitions in our debt instruments, which are Equity Partners refers to subsidiaries that we consolidate in our financial

further adjusted to reflect certain other cash and non-cash charges and are

statements under U.S. GAAP (other than wholly-owned subsidiaries), including

used to determine compliance with financial covenants and our ability to en-

KWE, and third-party equity providers.

gage in certain activities, such as incurring additional debt and making certain

Investment account refers to the consolidated investment account presented after noncontrolling interest on invested assets gross of accumulated depreciation.

K E N N E D Y - W I L S O N

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restricted payments.

RESULTS OF OPERATIONS The following table sets forth items derived from our consolidated statement of operations for the years ended December 31, 2014, 2013, and 2012: Year Ended December 31

2014

2013

2012

$ 82.6 270.2 28.4 17.4

$ 68.1 43.0 10.1 1.9

$ 53.3 8.5 2.3 2.8

398.6

123.1

66.9

Commission and marketing expenses Rental and hotel operating expense Cost of real estate sold Compensation and related expenses General and administrative Depreciation and amortization

5.6 116.4 20.7 113.8 42.1 104.5

3.6 18.9 7.9 76.7 24.6 17.4

4.6 4.5 2.2 55.8 19.5 4.9

Total operating expenses Income from unconsolidated investments

403.1 54.2

149.1 41.4

91.5 27.9

49.7

15.4

3.3

Acquisition-related gains Acquisition-related expenses Interest expense - investment Interest expense - corporate debt Early extinguishment of corporate debt Other income (expense) Income before (provision for) benefit from income taxes (Provision for) benefit from income taxes

218.1 (19.7) (46.3) (57.1) (27.3) 5.1 122.5 (32.4)

56.6 (1.6) (11.8) (39.9) — (1.9) 16.8 (2.9)

25.5 (0.7) (2.5) (26.1) — 7.0 6.5 0.2

Net income Net (income) attributable to the noncontrolling interests Preferred stock dividends and accretion of issuance costs

90.1 (68.2) (8.1)

13.9 (20.3) (8.1)

6.7 (2.5) (8.1)

$ 13.8

$ (14.5)

$ (3.9)

$ 440.3

$ 177.6

$ 92.1

$ 317.8

$ 159.1

$ 97.4

(dollars in millions)

Revenue Investment management, property services, and research fees Rental and hotel Sale of real estate Loans and other income Total revenue Operating expenses

Operating income Non-operating income (expense)

Net income (loss) attributable to Kennedy-Wilson Holdings,Inc. common shareholders Consolidated EBITDA Adjusted EBITDA

(1)

(2)

(1) (2) See Non-GAAP Measures section above for definition of Consolidated EBITDA and Adjusted EBITDA

P A G E

3 5

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) We use certain non-GAAP measures to analyze our business, including Consolidated EBITDA and Adjusted EBITDA. We use these metrics for evaluating the success of our company and believe that they enhance the understanding of our operating results. A reconciliation of net income to Consolidated EBITDA and Adjusted EBITDA is presented below: Year Ended December 31,

2014

2013

2012

2011

2010

$90.1

$13.9

$6.7

$7.5

$6.5

Interest expense - investment

46.3

11.8

2.5

1.6

0.7

Interest expense - corporate Early extinguishment of corporate debt Kennedy Wilson’s share of interest expense included in investment in unconsolidated investments Depreciation and amortization Kennedy Wilson’s share of depreciation and amortization included in unconsolidated investments

57.1 27.3

39.9 —

26.1 —

19.0 —

7.0 4.8

35.5

45.0

29.5

23.5

13.8

104.5

17.4

4.9

2.7

1.6

47.1

46.7

22.6

13.9

10.0

32.4

2.9

(0.2)

(2.0)

3.7

440.3

177.6

92.1

66.2

48.1

15.8 (138.3) —

7.5 (26.0) —

8.1 (2.8) —

5.1 (1.0) —

8.1 (3.0) 2.2

$317.8

$159.1

$97.4

$70.3

$55.4

(dollars in millions)

Net income Non-GAAP adjustments: Add back:

Provision for (benefit from) income taxes Consolidated EBITDA

(1)

Share-based compensation EBITDA attributable to noncontrolling interests Merger related compensation expenses Adjusted EBITDA(2)

(1)(2) See definitions in Non-GAAP Measures and Certain Definitions above. Prior to 2014, the Company reported an Adjusted EBITDA metric that was comparable to the Company’s current Consolidated EBITDA metric, as it was calculated as Consolidated EBITDA, adjusted to solely exclude merger related expenses and share based compensation expense. Beginning in 2014, as noncontrolling interests became more significant on the Company’s consolidated balance sheet, primarily due to the consolidation of KWE’s results in the Company’s financial statements, the Company determined that it was appropriate to supplement Consolidated EBITDA with a revised metric. Adjusted EBITDA shown above is calculated as Consolidated EBITDA, adjusted to exclude share based compensation expense and EBITDA attributable to noncontrolling interests. As set forth in the reconciliation table above, EBITDA attributable to noncontrolling interests for the years ended December 31, 2014, 2013, 2012, 2011 and 2010 were $138.3 million, $26.0 million, $2.8 million, $1.0 million, and $3.0 million, respectively.

P A G E

3 6

The following summarizes revenue, operating expenses, non-operating ex-

Year ended December 31,

penses, operating income (loss) and net income (loss) and calculates Consoli-

2014

2013

2012

Revenue

$82.6

$68.1

$53.3

Operating expenses

(61.1)

(40.7)

(33.3)

Operating income

21.5

27.4

20.0

dated EBITDA and Adjusted EBITDA by our investments, services and corporate

Services

operating segments years ended December 31, 2014, 2013, and 2012:

Year Ended December 31,

2014

2013

2012

5.9

—

—

27.4

27.4

20.0

Kennedy Wilson’s share of interest expense included in unconsolidated investments

1.5

—

—

Kennedy Wilson’s share of depreciation and amortization included in unconsolidated investments

3.4

—

0.2

Net income

Investments Revenue

$316.0

$ 55.0

$13.6

Operating expenses

(306.1)

(86.5)

(41.3)

48.3

41.4

28.0

Income from unconsolidated investments, net of depreciation and amortization

Income from unconsolidated investments, net of depreciation and amortization

Operating income Non-operating income (expense): Acquisition-related gains Other non-operating expenses

58.2

9.9

0.3

218.1 (60.9)

56.6 (15.6)

25.5 3.8

Total Non-operating income

157.2

41.0

29.3

Add back:

Operating expenses attributable to noncontrolling interests Fees eliminated in consolidation

Net income Add back (less): Interest expense - investment Kennedy Wilson’s share of interest expense included in unconsolidated investments Depreciation and amortization Kennedy Wilson’s share of depreciation and amortization included in unconsolidated investments EBITDA attributable to noncontrolling interests Fees eliminated in consolidation Adjusted EBITDA(1) (1) See definitions in Non-GAAP Measures discussion above.

215.4

50.9

29.6

46.3

11.8

2.5

Adjusted EBITDA(1)

5.4

—

—

21.6

4.3

4.6

$59.3

$31.7

$24.8

(1) See definitions in Non-GAAP Measures discussion above.

34.0

45.0

29.4

104.5

17.4

4.4

43.7

46.7

22.6

Operating expenses

(143.7)

(26.0)

(2.8)

(21.6)

(4.3)

(4.6)

$278.6

$141.5

$ 81.1

Year Ended December 31,

2014

2013

2012

$ (35.8)

$(21.9)

$(17.0)

Operating (loss) Non-operating income (expense): Other non-operating expenses

(35.8)

(21.9)

(17.0)

(84.4)

(39.6)

(25.9)

(Provision for) benefit from income taxes

(32.4)

(2.9)

0.2

(152.6)

(64.4)

(42.7)

15.8 57.1 27.3 32.4

7.5 39.9 — 2.9

8.1 26.1 — (0.2)

—

—

0.3

$ (20.0)

$(14.1)

$(8.4)

(dollars in millions)

Corporate

Net (loss) Add back: Stock-based compensation Interest expense - Corporate Loss on extinguishment of corporate debt Provision for (benefit from) income taxes Depreciation and amortization Adjusted EBITDA

(1)

(1) See definitions in Non-GAAP Measures discussion above.

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) The following table shows Adjusted Fees for the years ended December 31,

During the year ended December 31, 2014, we sold 10 condominium units generating $28.4 million of proceeds from the sale of real estate. During the

2014 and 2013: Year Ended December 31,

2014 $ 82.6

Investment management, property services and research fees Non-GAAP adjustments: Add back: Fees eliminated in consolidation(1)

year ended December 31, 2013, we sold 44 condominium units, generating $10.1 million of proceeds from the sale of real estate.

2013

Loans and other income was $17.4 million in 2014 compared to $1.9

$68.1

million 2013. The $15.5 million increase was mainly due to the acquisition of the notes on the Shelbourne Hotel in Dublin, Ireland, during the first quarter of 2014 and interest received on other discounted loan purchases by KWE

21.6

4.3

throughout the year. On August 1, 2014, we took title to the Shelbourne Hotel

16.8

—

and the loan was converted to real estate.

$121.0

$72.4

KW share of fees in unconsolidated service businesses(2) Adjusted Fees

Services Segment Revenues (1) The years ended December 31, 2014 and 2013 includes $14.3 million and $0 million of fees recognized in net (income) attributable to noncontrolling interests relating to the portion of fees paid by noncontrolling interest holders in KWE and other consolidated equity partner investments. There is no comparable activity in the prior period since KWE and the consolidation of non-wholly owned investments occurred during 2014.

Fees are earned on the following types of services provided: s investment management, including acquisition, asset management and disposition services;

(2) Included in income from unconsolidated investments relating to the Company’s investment in a servicing platform in Spain. The investment was made during the fourth quarter of 2013.

s property services, including management of commercial real estate for third-party clients, fund investors, and investments held by KW Group;

The following compares results of operations for the years ended December 31,

s research, including consulting practice and data and analytics for the residential real estate development and new home construction industry;

2014 and December 31, 2013 and years ended December 31, 2013 and

s auction and conventional sales, including innovative marketing and sales strategies for all types of commercial and residential real estate,

December 31, 2012. KW Group Consolidated Financial Results and Comparison of the Years Ended December 31, 2014 and 2013 KW Group’s revenues for the years ended December 31, 2014 and 2013 were $398.6 million and $123.1 million, respectively. Total operating expenses (which includes depreciation and amortization of $104.5 million and $17.4

including single family homes, mixed-use developments, estate homes, multifamily dwellings, new home projects, conversions and scattered properties; and s brokerage services, including innovative marketing programs tailored to client objectives for all types of investment grade and income producing real estate.

million, respectively) for the same periods were $403.1 million and $149.1 million, respectively. Net income attributable to our common shareholders was $13.8 million in 2014 compared to a net loss of $14.5 million in 2013. Consolidated EBITDA was $440.3 million and $177.6 million in 2014 and 2013, respectively. Adjusted EBITDA was $317.8 million and $159.1 million in 2014

Third Party Services—These are fees earned from third parties and relate to assets in which Kennedy Wilson does not have an ownership interest. KW Group’s third party fees increased by $3.1 million to $25.2 million during the year ended December 31, 2014 as compared to $22.1 million for 2013.

and 2013, respectively. The Company achieved a 148% increase in Consol-

Related Party Services—Our related party fees generated revenues of $57.4

idated EBITDA and a 100% increase in Adjusted EBITDA for the year ended

million in 2014 compared to $46.0 million in 2013. The increase in related

December 31, 2014 as compared to the same period in 2013.

party revenues primarily relates to management fees earned on the sale of a

Revenues

portfolio of commercial properties located in Dublin, Ireland. This increase was partially offset by acquisition fees of earned in 2013 related to the UK Loan

Investments Segment Revenues

Pool which was fully resolved during the second quarter of 2014.

Income is earned on the following types of investments:

Additionally, we earn certain fees on investments that we consolidate un-

s rental income on multifamily and commercial properties; s hotel income;

der US GAAP. As such, these fees are eliminated and excluded from total

s interest income on loans; and s sales of real estate

2014, fees eliminated in consolidation totaled $21.6 million, a $17.3 million

Rental and hotel income increased to $270.2 million in 2014 from $43.0

to the fees earned by Kennedy Wilson for its management of KWE. Total

million in 2013. The $227.2 million increase is primarily due to $3.2 billion in

management fees earned from KWE, which were eliminated in consolidation,

consolidated acquisitions (including $2.4 billion by KWE) during 2014 and con-

were $14.0 million for the year ended December 31, 2014. No performance

solidations of investments which were previously unconsolidated in the latter

was earned in 2014.

increase from the $4.3 million for the same period in 2013 primarily due

half of 2013 and the first half of 2014. K E N N E D Y - W I L S O N

H O L D I N G S ,

fees of $57.4 million and $46.0 million. For the year ended December 31,

I N C .

Operating Expenses Investments Segment Operating Expenses—Operating expenses for the year ended December 31, 2014 increased to $306.1 million compared to $86.5 million in 2013. The increase is attributable to the following: Rental and hotel operating expenses increased by $97.5 million and depreciation and amortization increased by $87.1 million due to $3.2 billion in consolidated acquisitions (including $2.4 billion of acquisitions by KWE) during 2014 and consolidations of investments which were previously unconsolidated in the latter half of 2013 and the first half of 2014. Compensation and related expenses increased by $12.7 million due to a 10% increase in personnel, particularly due to growth and expansion in the United Kingdom and Ireland including the launch of KWE. This increase included accrued discretionary compensation. General and administrative expenses increased by $8.9 million primarily due to growing operations in the United Kingdom and Ireland including the launch of KWE. During the year ended December 31, 2014 we sold 10 condominium units which resulted in $20.7 million of sale-related costs. During the year ended December 31, 2013, we sold 44 condominium units which resulted in $7.9 million of sale-related costs.

second quarter in 2014, the Company and its equity partners sold a portfolio of commercial properties located primarily in Dublin, Ireland to KWE. This transaction was unanimously approved by the independent shareholders of KWE. As a result of the sale, the Company recorded a profit of $26.6 million on its 25% interest in the investment. The current period also includes gains relating to the sale of three commercial properties in the Western United States by Kennedy Wilson and its equity partners. During 2013, the Company and one of its equity partners foreclosed on a class A office building and an adjacent 3.5 acre site in Dublin, Ireland, resulting in an acquisition-related gain of $30.1 million. The Company’s portion of the gain was $15.0 million and was recognized in income from unconsolidated investments. In 2013, the Company and one of its equity partners converted a mortgage note purchased in the fourth quarter of 2012 by the Company and its equity partners into a 100% equity interest on The Rock, a retail, residential and entertainment center in Manchester, United Kingdom. As a result of the conversion, the unconsolidated investment was required to consolidate the assets and liabilities at fair value. As the fair value of the assets were in excess of the basis in the previously held mortgage note, the unconsolidated investment recognized a $32.3 million acquisition-related gain. The Company’s portion of the gain was $16.2 million and was recognized in income from unconsolidated investments. Additionally, included in income from unconsolidated investments are acqui-

Services Segment Operating Expenses—Operating expenses (excluding

sition costs. During the year ended December 31, 2013, approximately $13.5

depreciation and amortization expense) for the year ended December 31, 2014

million of acquisition costs were included in income from unconsolidated in-

were approximately $61.1 million as compared to $40.7 million for 2013. The

vestments. The acquisition costs relate to professional fees and the payment of

increase is attributable to the following:

stamp duty taxes in the United Kingdom and Ireland.

Compensation and related expenses increased by $11.4 million due to an increase in personnel, accrued discretionary compensation and stock-based compensation. As a result of the expansion in our Meyers group, we increased our head count in order to service the demand of our customers in the capital sourcing and real estate research for the single-family homebuilding and multifamily apartment industries. Additionally, due to the growth in our Services Consolidated EBITDA, there was an increase in our accrued discretionary compensation. General and administrative expenses increased by $7.7 million primarily due to the growth of KW Group specifically in the United Kingdom, Ireland, and Meyers. Commissions and marketing expenses increased by $1.4 million due to the

Services Segment Income from Unconsolidated Investments—During the year ended December 31, 2014, income from unconsolidated investments was $5.9 million with no comparable activity in 2013. During the fourth quarter of 2013, Kennedy Wilson along with an equity partner acquired an interest in a loan servicing platform in Spain with approximately €23.0 billion of assets under management. The income recognized during 2014 relates to this acquisition. Non-Operating Income (Expense)—Acquisition-related gains were $218.1 million for the year ended December 31, 2014 compared to $56.6 million in 2013. On March 31, 2014, Kennedy Wilson and one of its equity partners

increase in leasing activity during 2014 as compared to 2013.

amended existing operating agreements governing six separate joint ventures

Corporate Operating Expenses—Operating expenses for the year ended

that hold real estate-related investments located in the U.K. and Ireland. Ken-

December 31, 2014 were approximately $35.8 million as compared to $21.9

nedy Wilson has an approximate 50% ownership interest in these investments.

million in 2013. Compensation and related expenses increased by $13.0 mil-

On June 30, 2014, Kennedy Wilson and one of its equity partners amended an

lion primarily due to the increase in accrued discretionary compensation in

existing operating agreement governing 50 multifamily buildings in and around

connection with the increase in Adjusted EBITDA and the additional resources

Tokyo, Japan comprising approximately 2,400 units. Kennedy Wilson has an

and costs associated with growing the Company.

approximate 41% ownership interest in these investments. These joint ventures were previously accounted for by Kennedy Wilson on an equity method

Income from Unconsolidated Investments Investments Segment Income from Unconsolidated Investments—Income from unconsolidated investments generated income of $54.2 million for the year ended December 31, 2014, as compared to income of $41.4 million in 2013. During the

basis. As the fair value of Kennedy Wilson’s interests in these properties were in excess of the carrying value, acquisition-related gains of $150.8 million were recorded in the accompanying consolidated statement of operations for the year ended December 31, 2014.

P A G E

3 9

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) In addition, during the quarter ended March 31, 2014, we foreclosed on a

new investments and consolidations of previously consolidated investments in

133,000 square foot retail center and an adjacent 2.4 acre vacant lot in Van

the latter half of 2013 and during 2014, including acquisitions made by and

Nuys, California. As a result of the foreclosure and taking title to the properties,

the consolidation of KWE.

we consolidated the assets and liabilities at fair value. As the fair value of the

Loss on early extinguishment of corporate debt was $27.3 million in 2014

assets was in excess of the basis in the previously held mortgage notes, we

with no comparable activity in 2013. The loss was due to the early repayment

recognized a $3.7 million acquisition related gain. Also during the quarter ended

of $40 million of our junior subordinated debt in the third quarter and the

June 30, 2014, KWE acquired subordinated notes secured by 20 commercial

refinancing of $350 million of 8.75% senior notes due 2019 with the proceeds

properties located throughout England and Scotland and used its position as a

of $350 million of 5.875% senior notes due 2024 and cash on hand in the

debt holder to secure the acquisition of the underlying properties. This transaction

fourth quarter. The payoff of the junior subordinated debt and the refinancing

resulted in the recognition of an acquisition-related gain of $15.6 million due

of our 8.75% Senior Notes will save the Company approximately $13.7 million

to the ability to acquire the underlying real estate at a discount to its fair value.

annually in interest.

In August 2014, Kennedy Wilson converted its note secured by the

Provision for income taxes was $32.4 million in 2014 as compared to a

landmark Shelbourne Hotel located in Dublin, Ireland into a direct 100% own-

provision for income taxes of $2.9 million in 2013 due to higher taxable income

ership interest in the property. As a result of taking title to the property, the

in the United States. The Company had $114.4 million and $73.2 million of

assets and liabilities were consolidated in KW Group’s financial statements

federal and state net operating losses as of December 31, 2013, respectively.

at fair value and an acquisition-related gain of $28.6 million was recognized.

We had net income of $68.2 million attributable to noncontrolling interest

In December 2014, the Company increased its ownership from approximately

during the year ended December 31, 2014 compared to net income attrib-

42% to approximately 87% in a previously unconsolidated 750-unit apartment

utable to noncontrolling interest of $20.3 million during the same period for

building in the Western U.S. As a result of gaining control of the asset, the

2013. The increase is mainly due to the $78.7 million of the total $218.1 mil-

Company was required to consolidate the assets and liabilities at fair value and

lion acquisition-related gains described above being allocated to noncontrolling

recognized an acquisition-related gain of $19.5 million of which $3.7 million

interest holders and the consolidation of KWE, in which our ownership was

was allocated to our noncontrolling equity partners.

14.9% of KWE’s total share capital as of December 31, 2014.

The acquisition related gains in 2013 are primarily attributable to a $45.1

We had accumulated other comprehensive loss of $28.2 million at Decem-

million gain on the consolidation of the Ritz Carlton, Lake Tahoe and a $9.5

ber 31, 2014 compared to accumulated other comprehensive income of $9.2

million gain from acquiring a controlling interest in a multifamily property in

million ad December 31, 2013. The decrease of $37.4 million is a result of

Northern California. The gain associated with the Ritz Carlton, Lake Tahoe is

having increased international investments which are denominated in foreign

due to the Company and one of its equity partners amending an existing oper-

currencies. During the year December 31, 2014 approximately 45% of our

ating agreement where the Company gained control of the property which was

investment account is denominated in foreign currencies that all weakened

previously accounted for as an equity method investment. The gain associated

against the U.S. dollar, including the Euro, the British pound sterling, and the

with the multifamily property was triggered when the Company acquired the

Japanese yen. Fluctuations in foreign currency exchange rates affect reported

interests of some of its equity partners which increased the Company’s owner-

amounts of our total assets and liabilities, which are reflected in our financial

ship from 15% to 94%. As a result of obtaining control of both properties and

statements as translated into U.S. dollars for each financial reporting period

as the fair value was in excess of the carrying value of its ownership interests,

at the exchange rate in effect on the respective balance sheet dates, and our

the acquisition gains noted above were recognized.

total revenue and expenses, which are reflected in our financial statements

Acquisition related expenses were $19.7 million for the year ended December 31, 2014 compared to $1.6 million in 2013. The increase is primarily due to acquisition activity by KWE for the year, which launched in February 2014.

as translated into U.S. dollars at the average exchange rate for each financial reporting period. We routinely monitor our exposure to currency exchange rate changes

Interest expense associated with corporate debt was $57.1 million in 2014

in connection with our international investments and enter into foreign cur-

as compared to $39.9 million in 2013. The increase in corporate interest ex-

rency exchange swap, option and forward contracts to limit our exposure to

pense is attributable to the issuance of $300.0 million aggregate principal of

such transactions, as appropriate. We typically hedge 50%-100% of book

the 2024 Notes which occurred in March 2014 and interest incurred on the

equity exposure against these foreign currencies. Please refer to note 6 in

revolving line of credit, which had a higher average balance outstanding and

the notes to our consolidated financial statements for additional informa-

committed amount available which both lead to increases in interest expense.

tion regarding our forward currency contracts and option positions as of

Interest expense associated with the investment debt was $46.3 million in 2014 as compared to $11.8 million. The increase is due to the acquisition of

P A G E

4 0

December 31, 2014.

KW Group Consolidated Financial Results and Comparison of the Years Ended December 31, 2013 and 2012

pared to $8.0 million in 2012. The increase in commission revenues are

KW Group’s revenues for the years ended December 31, 2013 and 2012 were

primarily driven by acquisition fees earned on increased investment activity

$123.1 million and $66.9 million. Total operating expenses for the same peri-

mainly in the United Kingdom and Ireland.

In 2013, our related party commission revenues were $10.0 million com-

ods were $149.1 million and $91.5 million, respectively. Net loss attributable

Additionally, we earn certain fees on investments that we consolidate under

to our common shareholders was $14.5 million and $3.9 million in 2013 and

US GAAP. As such, these fees are eliminated and excluded from total fees of

2012, respectively. Consolidated EBITDA was $177.6 million and $92.1 mil-

$46.0 million and $32.5 million as of December 31, 2013 and 2012, respec-

lion in 2013 and 2012, respectively. Adjusted EBITDA was $159.1 million and

tively. For the year ended December 31, 2013, fees eliminated in consolidation

$97.4 million in 2013 and 2012, respectively. The Company achieved a 93%

totaled $4.3 million, a slight decrease of $0.3 million from the $4.6 million for

increase in Consolidated EBITDA and a 59% increase in Adjusted EBITDA for

the same period in 2012.

the year ended December 31, 2013 as compared to the same period in 2012.

Operating Expenses

Revenues Investments Segment Operating Expenses—Operating expenses for the Investments Segment Revenues—Rental and hotel income increased to

year ended December 31, 2013 increased to $84.7 million compared to

$43.0 million in 2013 from $8.5 million in 2012. The $34.5 million increase

$41.3 million for the same period in 2012. The increase is attributable to the

is due to $18.1 million in rental income from new acquisitions and consolida-

following:

tions of previously unconsolidated investments in 2013 and $16.3 million from properties acquired at the end of 2012.

Compensation and related expenses increased by $9.3 million due to an increase in personnel, particularly due to our growth and expansion in the Unit-

During the year ended December 31, 2013, we sold 44 condominium units

ed Kingdom and Ireland, to source and execute on acquisition opportunities.

generating $10.1 million of proceeds from the sale of real estate. During the

Additionally, accrued discretionary compensation increased in connection with

year ended December 31, 2012, we sold five condominium units, generating

the increase in Investments Consolidated EBITDA. General and administrative

$2.3 million of proceeds from the sale of real estate.

expenses increased by $2.9 million primarily due to increased travel and rental

Services Segment Revenues

expense relating to our growing operations in the United Kingdom and Ireland. Rental and hotel operating expenses increased by $14.4 million and de-

Third Party Services—These are fees earned from third parties and relate to

preciation and amortization increased by $11.2 million due to the acquisitions

assets in which Kennedy Wilson does not have an ownership interest.

during 2013 and the end of 2012.

Our third party fees increased to $18.1 million during the year ended

During the year ended December 31, 2013 we sold 44 condominium units

December 31, 2013 as compared to $15.8 million for the same period in

which resulted in $7.9 million of sale-related costs. During the year ended

2012. The $2.3 million or 15% increase primarily relates to the acquisition of

December 31, 2012, we sold five condominium units which resulted in $2.2

Meyers in March 2012.

million of sale-related costs.

Our third party commission revenues were at $4.0 million in 2013 as compared to $5.0 million in 2012. The decrease is driven by our auction services

Services Segment Operating Expenses—Operating expenses (excluding

business which has historically been countercyclical. Improvements in the U.S.

depreciation and amortization expense) for the year ended December 31, 2013

real estate markets have caused auction service revenues to decrease.

were approximately $40.7 million as compared to $33.1 million for the same period in 2012. The increase is attributable to the following:

Related Party Services—Our related party fees generated revenues of $36.0

Compensation and related expenses increased by $6.0 million due to an

million in 2013 compared to $24.5 million in 2012. The $11.5 million, or 47%,

increase in personnel and in accrued discretionary compensation. As a result

increase primarily relates to an increase of $6.6 million in additional asset

of the expansion in our Meyers group, we increased our head count in order

management fees earned on a loan pool we acquired in the United Kingdom

to service the demand of our customers in the capital sourcing and real estate

due to the expected resolution period being shortened to two years from the

research for the single-family homebuilding and multifamily apartment indus-

initial budget of three years. In addition, we earned $2.7 million in asset man-

tries. Additionally, due to the growth in our Services Consolidated EBITDA there

agement fees relating to a new loan pool in the United Kingdom that was en-

was an increase in our accrued discretionary compensation.

tered into in December 2012. Also during 2013, additional base management

General and administrative expenses increased by $2.5 million primarily

fees were earned mainly due to the admission of new investors into one of

due to the growth of the Company specifically in the United Kingdom and Ire-

our funds and as a result of our increased investment activity in the United

land and the Meyers expansion.

Kingdom and Ireland.

K E N N E D Y - W I L S O N

H O L D I N G S ,

I N C .

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) Commissions and marketing expenses decreased by $1.0 million due to the decrease in auction sales previously discussed.

2013. We accreted an additional $0.6 million of interest income on a loan pool we acquired in the United Kingdom as compared to the same period in 2012 due to the expected resolution period being shortened to two years from

Corporate Operating Expenses—Operating expenses (excluding depreciation and amortization expense) for the year ended December 31, 2013 were approximately $21.9 million as compared to $16.7 million for the same period in 2012. Compensation and related expenses increased by $5.5 million primarily due to the increase in accrued discretionary compensation in connection with the increase in Adjusted EBITDA and the additional resources and costs associated with growing the Company.

the initial budget of three years. Additionally, we had a $2.6 million increase in accreted income from loan pools in the Western United States due to an increase in resolution periods on one pool in 2012 which led to a decrease in accreted income for the year ended December 31, 2012. Offsetting these increases in the year ended December 31, 2013 was a $1.2 million decrease in interest income on our notes receivable mainly due to a note we held on a multifamily property that was converted to real estate at the end of 2012.

Investments Segment Income from Unconsolidated Investments—Income from unconsolidated investments was $29.8 million for the year ended December 31, 2013, as compared to income of $21.5 million in 2012. The income in 2013 and 2012 was primarily derived from conversions of loans into real estate, property sales and fair value gains as further discussed below. During the year ended December 31, 2013, the Company and its equity partners converted three loans into real estate which resulted in gains of $72.5 million, of which $36.2 million was a gain to us and $36.3 million to our noncontrolling interest holders. In addition, there were gains of $57.1 million, of which $13.4 million was a gain to us and $43.2 million to our noncontrolling interest holders. Included in income from unconsolidated investments are onetime acquisition costs which are non-recurring. During the year ended December 31, 2013, approximately $13.5 million of acquisition costs were included in income from unconsolidated investments.

Non-Operating Income (Expenses)—Acquisition-related gains were $56.6 million for the year ended December 31, 2013 compared to $25.5 million for the same period in 2012. The acquisition related gains in 2013 are primarily attributable to a $45.1 million gain on the consolidation of the Ritz Carlton, Lake Tahoe and a $9.5 million gain from acquiring a controlling interest in a multifamily property in Northern California. The gain associated with the Ritz Carlton, Lake Tahoe is due to the Company and one of its equity partners amending an existing operating agreement where the Company gained control of the property which was previously accounted for as an equity method investment. The gain associated with the multifamily property was triggered when the Company acquired the interests of some of its equity partners which increased the Company’s ownership from 15% to 94%. As a result of obtaining control of both properties and as the fair value was in excess of the carrying value of its ownership interests, the acquisition gains above were recognized.

During the year ended December 31, 2012, the Company and its equity partners sold six multifamily properties (through property sales and sale of equity interest) located in the Western United States for a total of $251.7 million, which resulted in a total gain of $33.7 million, of which $10.1 million was a gain to us and $3.0 million to our noncontrolling interest holders. In addition, we recognized $9.4 million of unrealized fair value gains. During the year ended December 31, 2012, approximately $2.4 million of acquisition costs were included in equity in joint venture income.

The acquisition-related gains in 2012 is mainly due to a change of control and resulting consolidation of KW Property Fund II, LP (“Fund II”), a limited partnership that had been previously accounted for using the equity method. As the fair value was in excess of the carrying value of our equity method ownership interest, we recorded an acquisition related gain in the amount of $22.8 million. Acquisition related expenses were $1.6 million for the year ended December 31, 2013 compared to $0.7 million for the same period in 2012. The

Our share of depreciation generated at the joint venture level was $46.7 million and $22.6 million for the years ended December 31, 2013 and 2012. We look at income from unconsolidated investments plus our share of the joint ventures depreciation to get a better sense of earnings before depreciation and amortization. Those amounts were $76.5 million and $44.1 million for the years ended December 31, 2013 and 2012, respectively, representing a 73% increase.

increase is due to increased acquisition activity and the write off of costs associated with potential acquisitions which ultimately did not materialize. Interest expense associated with corporate debt was $39.9 million in 2013 as compared to $26.1 million in 2012. The increase is due to the issuance of an additional $100.0 million aggregate principal of the 2019 Notes and $55.0 million aggregate principal of the 2042 Notes which both occurred in December 2012. Also, our revolving line of credit had a higher average balance

Investments Segment Income from Unconsolidated Investments—Income

outstanding and committed amount available in 2013 as compared to 2012,

from unconsolidated investments generated income of $13.5 million in 2013

which both led to increases in interest expense. Interest expense associated with investments was $11.8 million in 2013

as compared to $9.2 million in 2012. Before August 2012 and December 31, 2013, we acquired three additional loan pools in the United Kingdom and one in Ireland which together provided $2.3 million of additional interest income during the year ended December 31,

K E N N E D Y - W I L S O N

H O L D I N G S ,

I N C .

as compared to $2.5 million. The increase is due to the acquisitions that we closed during 2013 and the end of 2012.

There were no gains on marketable securities during the year ended

To the extent that we engage in additional strategic investments, including

December 31, 2013 compared to $4.3 million during 2012. The gain in the

real estate, note portfolios, or acquisitions of other real estate related compa-

prior period related to the sale of the Company’s investment in the ordinary

nies or real estate related securities, we may need to obtain third party financ-

stock of the Bank of Ireland.

ing which could include bank financing or the public sale or private placement

Foreign currency translation loss was $2.8 million during the year end

of debt or equity securities.

December 31, 2013 compared to no comparable activity in the prior period due

Under our current joint venture strategy, we generally contribute property

to the recognition of foreign currency loss on a loan pool we acquired in the United

expertise and a fully funded initial cash contribution, with commitments to pro-

Kingdom as the investment was substantially liquidated at the end of 2013.

vide additional funding. Capital required for additional improvements and sup-

Provision for income taxes was $2.9 million in 2013 as compared to a

porting operations during leasing and stabilization periods is generally obtained

benefit from income taxes of $0.2 million in 2012 due to higher taxable income

at the time of acquisition via debt financing or third party investors. Accordingly,

in the United States. The Company had $114.4 million and $73.2 million of

we generally do not have significant capital commitments with unconsolidated

federal and state net operating losses as of December 31, 2013.

entities. However, there may be certain circumstances when we, usually with

We had net income of $20.3 million attributable to a non-controlling interests in 2013 compared to $2.5 million in 2012. The increase is due to

the other members of the joint venture entity, may be required to contribute additional capital for a period of time.

$22.6 million of the Ritz Carlton, Lake Tahoe acquisition-related gain of the

Our need to raise funds from time to time to meet our capital requirements

total $56.6 million described above being allocated to the Company’s non-

will depend on many factors, including the success and pace of the implemen-

controlling equity partner. This was offset by interest and depreciation expense

tation of our strategy for strategic and accretive growth. We regularly monitor

associated with Fund II being allocated to noncontrolling interest holders.

capital-raising alternatives to be able to take advantage of other available av-

During 2012 the net income attributable to non-controlling interest holders

enues to support our working capital and investment needs, including stra-

was primarily due to a gain from the sale of a multifamily property.

tegic partnerships and other alliances, bank borrowings (including cash-out refinances), and the sale of equity or debt securities. We expect to meet the

LIQUIDITY AND CAPITAL RESOURCES

repayment obligations of our senior notes and borrowing under our line of

Our liquidity and capital resources requirements include acquisitions of real

credit from cash generated by our business activities, including the sale of

estate and real estate related assets, capital expenditures for consolidated real

assets and the refinancing of debt.

estate and unconsolidated investments and working capital needs. We finance

During the year ended December 31, 2014, the Company generated a book

these operations with internally generated funds, borrowings under our revolv-

loss of $62.3 million related to operations in the United Kingdom and Ireland.

ing lines of credit, sales of equity and debt securities and cash out refinancings

A foreign tax benefit of $3.9 million is included in the consolidated tax provision

to the extent they are available and fit within our overall portfolio leverage

for income taxes related to the portion of income earned directly by subsid-

strategy. Our investments in real estate are typically financed with equity from

iaries in the United Kingdom and Ireland for the year ended December 31,

our balance sheet, third party equity and mortgage loans secured primarily by

2014. U.S. domestic taxes have not been provided for in the consolidated

that real estate. These mortgage loans are generally nonrecourse in that, in the

tax provision on amounts earned directly by these subsidiaries since it is the

event of default, recourse will be limited to the mortgaged property serving as

Company’s plan to indefinitely invest amounts earned by these subsidiaries in

collateral, subject to limited customary exceptions. In some cases, we guaran-

the United Kingdom and Ireland operations. If these subsidiaries’ cumulative

tee a portion of the loan related to a consolidated property or an unconsolidated

earnings were repatriated to the United States additional U.S. domestic taxes

investment, usually until some condition, such as completion of construction or

of $4.5 million would be incurred. Additionally, approximately $741.3 million of

leasing or certain net operating income criteria, has been met. We do not ex-

our consolidated cash and cash equivalents is held by our subsidiaries in the

pect these guarantees to materially affect liquidity or capital resources. Please

United Kingdom, Ireland and Japan.

refer to the “Off Balance Sheet Arrangements” section for further information. Historically, we have not required significant capital resources to support our

Foreign Currency and Currency Derivative Instruments

brokerage and property management operations.

Fluctuations in foreign exchanges rates may have a significant impact on the

We believe that our existing cash and cash equivalents plus capital gener-

results of our operations. In order to manage the effect of these fluctuations,

ated from property management and leasing, brokerage, sales of real estate

we generally hedge our book equity exposure to foreign currencies through

owned, collections from loans and loan pools, as well as our current revolving

currency forward contracts and options. We typically hedge 50%-100% of

line of credit, will provide us with sufficient capital requirements to maintain our

book equity exposure against these foreign currencies.

current portfolio for at least the next twelve months.

P A G E

4 3

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) As of December 31, 2014, approximately 45% of our investment account

folio of 14 assets comprised of commercial, retail and industrial assets which

is invested through our foreign platforms in their local currencies. Investment

was subsequently contributed into KWE as part of its initial public offering. The

level debt is generally incurred in local currencies and there we consider our

cash used in the aforementioned investing activities was offset by receipt of

equity investment as the appropriate exposure to evaluate for hedging purposes.

$111.8 million in distributions from our unconsolidated investments primarily

For 2014 and 2013, we recorded a gain, net of taxes, of $9.5 million and

due to refinancing of property level debt and the sale of underlying properties.

$3.1 million, respectively, in other comprehensive income as the portion of the

Net cash used in investing activities totaled $348.8 million for the year

currency forward contract used to hedge the currency exposure of certain of

ended December 31, 2013. We invested $322.7 million of equity in uncon-

our wholly owned, controlled subsidiaries and unconsolidated investments that

solidated investments of which $265.5 million was for new investments and

qualify as a net investment hedge under ASC Topic 815.

$57.2 million for contributions to existing joint venture investments to pay off external debt, fund our share of a development project, and for working capital

Cash Flows The following table summarizes the cash provided by or used in our operating, investing and financing activities for the years ended December 31, 2014 and December 31, 2013:

ties in Ireland and the United Kingdom, one multifamily property in Ireland, and a servicing business in Spain. The remaining $49.4 million of new investments was for four commercial properties, two multifamily properties, and three

Year Ended December 31, (dollars in millions)

Net cash provided by operating activities Net cash used in investing activities Net cash provided by financing activities

needs. Of the new investments, $216.1 million was for 56 commercial proper-

$

projects all in the Western United States. We invested $168.5 million in the

2014

2013

acquisitions of consolidated real estate relating to three multifamily and four

98.1 (2,473.2) 3,163.4

$ 31.3 (348.8) 371.4

commercial properties in the Western United States as well as one commercial property in Ireland. In addition, we invested $96.6 million to fund our equity in new and existing loans. The cash used in the aforementioned investing activities was offset by

Operating—Our cash flows from operating activities are primarily dependent upon the occupancy levels of our portfolio, the rental rates achieved on our leases, the collectability of rent and recoveries from our tenants, and the level of operating expenses and other general and administrative costs, including operating distributions from our unconsolidated investments, revenues from our services business net of operating expenses, and payment of interest

$93.9 million in distributions from our loan pools primarily due to loan resolutions and the receipt of $81.5 million in distributions from our joint ventures. The $81.5 million of distributions is comprised of refinancing of property level debt of $52.9 million, $15.6 million from the sale of underlying properties, and $10.8 million from the settlement of several Japanese yen-related hedges. In addition, we received $46.0 million due to the settlement of loans.

expense on the Company’s corporate and consolidated investment debt. Net cash provided by operating activities totaled $98.1 million for the year

Financing—Our net cash related to financing activities is generally im-

ended December 31, 2014 as compared to $31.3 million for the year ended

pacted by capital-raising activities net of dividends and distributions paid

December 31, 2013.

to common and preferred shareholders and noncontrolling interests as well as financing activities for consolidated real estate investments. Net

Investing—Our cash flows from investing activities are generally comprised of cash used to fund property acquisitions, investments in unconsolidated investments, capital expenditures, purchases of loans secured by real estate, as well as return of capital investments from dispositions or refinances on our investments and resolutions in our loan participations and loan pools. Net cash used in investing activities totaled $2.5 billion for the year ended December 31, 2014. The increase was primarily due to $2.0 billion of purchases and additions to real estate by KW Group (including $1.7 billion by KWE). In addition, KW Group invested $536.8 million (including $373.2 million by KWE) to fund our equity in loans. The investment in the loans were mainly for the acquisition of notes secured by the Shelbourne Hotel in Dublin, Ireland (100% owned by KWH) and the acquisition of subordinated notes throughout Ireland and the United Kingdom by KWE. Additionally, $167.7 million of equity was invested in unconsolidated investments of which $29.2 million related to the of acquisition of a loan portfolio by KWE and $57.2 million related to the acquisition of a port-

P A G E

4 4

cash provided by financing activities totaled $3.2 billion for the year ended December 31, 2014. This was primarily due to proceeds, net of issuance costs, of $1.8 billion from noncontrolling interest holders for the initial public offering of KWE, net proceeds of $190.6 million received from the issuance of 9.2 million shares of common stock primarily to institutional investors, the issuance of $650.0 million of senior notes which generated $647.2 million in proceeds, and $1.3 billion of proceeds from mortgage loans to finance and refinance consolidated property acquisitions of which $921.8 million related to financing by KWE. These were offset by repayment of $345.8 million of investment debt, of which $256.9 million were related to repayments by KWE, and the extinguishment of our junior subordinated debt of $40 million and the payment of cash dividends of $38.9 million to our common and preferred shareholders.

Net cash provided by financing activities totaled $371.4 million for the year

issuer, Kennedy-Wilson Holdings, Inc., as parent guarantor, certain subsidiaries

ended December 31, 2013. This was primarily due to proceeds of $275.9

of the issuer, as subsidiary guarantors, and Wilmington trust National Associa-

million received from the issuance of 17.3 million shares of common stock

tion, as trustee (the indenture, as so supplemented, the“2024 Indenture”). The

primarily to institutional investors, $112.5 million of proceeds from mortgage

issuer’s obligations under the 2024 Notes are fully and unconditionally guar-

loans to finance consolidated property acquisitions, and $15.4 million from the

anteed by Kennedy-Wilson Holdings, Inc. and the subsidiary guarantors. At any

exercise of 2.7 million warrants. This was offset by payments of cash dividends

time prior to April 1, 2019, the issuer may redeem the 2024 Notes, in whole or

of $24.1 million to our common and preferred shareholders and $5.2 million

in part, at a redemption price equal to 100% of their principal amount, plus an

for the repurchase of Company’s common stock and warrants.

applicable “make-whole” premium and accrued and unpaid interest, if any, to

Since our common stock became listed on the NYSE in November 2009

the redemption date. At any time and from time to time on or after April 1, 2019,

through December 31, 2014, cumulative preferred and common dividends de-

the issuer may redeem the 2024 Notes, in whole or in part, at the redemption

clared were $40.7 million and $72.9 million, respectively, and are included as

price specified in the 2024 Indenture, plus accrued and unpaid interest, if any,

a component of retained earnings in the accompanying consolidated balance

to the redemption date. Prior to April 1, 2017, the issuer may also redeem up

sheet and consolidated statement of equity.

to 35% of the 2024 Notes from the proceeds of certain equity offerings. Interest on the 2024 Notes accrues at a rate of 5.875% per annum and is payable

CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS

semi-annually in arrears on April 1 and October 1 of each year, commencing on October 1, 2014. The 2024 Notes will mature on April 1, 2024. In November

At December 31, 2014, our contractual cash obligations, including debt, lines of credit, and operating leases included the following:

aggregate principal amount of 5.875% Senior Notes, due 2024. The Notes have Payments due by period

Total

(dollars in millions)

Less than 1 year

1–3 years

2014, the Company completed an additional public offering of $350.0 million

4–5 years

After 5 years

substantially identical terms as the “2024 Notes” mentioned above, and are treated as a single series with the “2024 Notes” under the 2024 Indenture. The additional 2024 Notes were issued and sold at a public offering price of 100.0%

Contractual obligations Borrowings:(1) Investment debt(2) Senior notes(3) Line of Credit

$2,180.5 705.0 125.0

$108.8 — —

$295.4 — 125.0

$1,253.1 — —

$ 523.2 705.0 —

Total borrowings

3,010.5

108.8

420.4

1,253.1

1,228.2

Operating leases

9.9

3.1

3.9

1.5

1.4

Total contractual cash obligations

$3,020.4

$111.9

$424.3

of their principal amount, plus accrued interest from, and including, October 1,

$1,254.6 $1,229.6

2014. The amount of the 2024 Notes included in the accompanying consolidated balance sheets was $647.4 million at December 31, 2014. In December 2012, Kennedy-Wilson, Inc. completed a public offering of $55.0 million aggregate principal amount of 7.750% Senior Notes due 2042 (the “2042 Notes”). The 2042 Notes were issued pursuant to an indenture dated as of November 28, 2012, by and among Kennedy-Wilson, Inc., as issuer, Kennedy-Wilson Holdings, Inc., as parent guarantor, certain subsidiaries

(1) See Notes 8-11 of our Notes to Consolidated Financial Statements. Figures do not include scheduled interest payments. Assuming each debt obligation is held until maturity, we estimate that we will make the following interest payments: Less than 1 year-$108.5 million; 1-3 years-$299.4 million; 4-5 years-$150.6 million; After 5 years: $263.1 million. The interest payments on variable rate debt have been calculated at the interest rate in effect as of December 31, 2014.

of the issuer, as subsidiary guarantors and Wilmington Trust National Associa-

(2) Excludes $15.4 million of unamortized debt premiums on investment debt.

prior to December 1, 2017, the issuer may redeem the 2042 Notes, in whole

(3) Excludes $2.6 million of net unamortized debt discount on senior notes.

or in part, at a redemption price equal to 100% of their principal amount,

Indebtedness and Related Covenants

plus an applicable “make-whole” premium and accrued and unpaid interest,

The following describes our corporate indebtedness and related covenants.

tion, as trustee, as amended by various subsequent supplemental indentures. The issuer’s obligations under the 2042 Notes are fully and unconditionally guaranteed by Kennedy Wilson and certain subsidiary guarantors. At any time

if any, to the redemption date. At any time and from time to time on or after December 1, 2017, the issuer may redeem the 2042 Notes, in whole or in part,

Senior Notes Payable

at a redemption price equal to 100% of their principal amount, plus accrued

In March 2014, Kennedy-Wilson, Inc., completed a public offering of $300.0

and unpaid interest, if any, to the redemption date. Interest on the 2042 Notes

million aggregate principal amount of 5.875% Senior Notes due 2024 (the “2024

accrues at a rate of 7.750% per annum and is payable quarterly in arrears

Notes”), for approximately $290.7 million, net of discount and estimated offering

on March 1, June 1, September 1 and December 1 of each year. The 2042

expenses. The 2024 Notes were issued pursuant to an indenture dated as of

Notes will mature on December 1, 2042. The amount of the 2042 Notes in-

March 25, 2014, by and among Kennedy-Wilson, Inc., as issuer, and Wilming-

cluded in the accompanying consolidated balance sheets was $55.0 million at

ton Trust National Association, as trustee, as supplemented by a supplemental

December 31, 2014.

indenture, dated as of March 25, 2014, by and among Kennedy-Wilson, Inc. as

K E N N E D Y - W I L S O N

H O L D I N G S ,

I N C .

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) In April 2011, Kennedy-Wilson, Inc. issued $200.0 million in aggregate

Junior Subordinated Notes

principal amount of its 8.750% Senior Notes due 2019, for approximately

In 2007, Kennedy Wilson issued junior subordinated debentures in the amount

$198.6 million, net of discount. An additional $50.0 million in aggregate prin-

of $40.0 million. The debentures were issued to a trust established by Ken-

cipal amount of its 8.750% Senior Notes due 2019 was issued in April 2011

nedy Wilson, which contemporaneously issued $40.0 million of trust preferred

for approximately $50.8 million, net of premium. In December 2012, Kenne-

securities to Merrill Lynch International. In September 2014, Kennedy Wilson

dy-Wilson, Inc. issued an additional $100.0 million aggregate principal amount

extinguished its junior subordinated debt for $41.5 million which resulted in a

of these 8.750% senior notes for approximately $105.3 million, net of premi-

$1.5 million loss on early extinguishment of corporate debt.

um and pre-issuance accrued interest. Collectively, these notes are referred to as “the 2019 Notes.” In November 2014, Kennedy Wilson extinguished its

Debt Covenants

2019 Notes with an aggregate face value of $350.0 million (and an aggregate

The unsecured credit facility with U.S. Bank, East West Bank, Bank of Ireland,

carrying value of $353.5 million) for $380.1 million with the proceeds from the

Bank of America, N.A., Deutsche Bank AG New York Branch and J.P. Morgan

November 2014 issuance of 2024 Notes, together with cash on hand, which

Chase Bank, N.A., and the indentures governing the 2024 Notes and 2042

resulted in a $25.8 million loss on early extinguishment of corporate debt.

Notes contain numerous restrictive covenants that, among other things, limit Kennedy Wilson’s and certain of its subsidiaries’ ability to incur additional in-

Borrowings under Line of Credit

debtedness, pay dividends or make distributions to stockholders, repurchase capital stock or debt, make investments, sell assets or subsidiary stock, create

KWH Facility Kennedy-Wilson, Inc. has an unsecured revolving credit facility (“KWH Facility”) with U.S. Bank, East-West Bank and Bank of Ireland that bears interest at a rate equal to LIBOR plus 2.75% and has a maturity date of October 1, 2016. In July 2014 Kennedy-Wilson, Inc. increased its unsecured corporate line of credit facility from $140.0 million to $300.0 million. The increase was driven by the admission of Bank of America, N.A., Deutsche Bank AG New York Branch and J.P. Morgan Chase Bank, N.A. to the existing lender syndicate and an increased commitment from The Governor and Company of the Bank of Ireland. As of December 31, 2014, the unsecured credit facility had a balance of $125.0 million outstanding and $175.0 million was still available.

or permit liens on assets, engage in transactions with affiliates, enter into sale/ leaseback transactions, issue subsidiary equity and enter into consolidations or mergers. The unsecured credit facility requires Kennedy Wilson to maintain a minimum tangible net worth and a specified amount of cash and cash equivalents. The revolving loan agreement that governs the unsecured credit facility requires Kennedy Wilson to maintain (i) a minimum rent adjusted fixed charge coverage ratio (as defined in the revolving loan agreement) of not less than 1.50 to 1.00, measured on a four-quarter rolling average basis; (ii) maximum balance sheet leverage (as defined in the revolving loan agreement) of not greater than 1.50 to 1.00, measured at the end of each calendar quarter;

KWE Facility

(iii) an effective tangible net worth (as defined in the revolving loan agreement)

In August 2014, KWE entered into a three year unsecured floating rate

equal to or greater than $500.0 million, measured at the end of each calendar

revolving debt facility (“KWE Facility”) of approximately $350 million

quarter; and (iv) unrestricted cash, cash equivalents` and publicly traded mar-

(£225 million) with a syndicate of banks. The facility was undrawn as of

ketable securities in the aggregate amount of at least $40.0 million.

December 31, 2014. The KWE Facility requires KWE to maintain (i) a maxi-

As of December 31, 2014, Kennedy Wilson’s rent adjusted fixed charge

mum consolidated leverage ratio (as defined in the revolving loan agreement)

coverage ratio was 2.99 to 1.00, its balance sheet leverage ratio was 0.98

not to exceed 60%; (ii) minimum net asset value not to fall below IFRS NAV

to 1.00, and its effective tangible net worth and its unrestricted cash, cash

(as defined in the KWE Facility agreement) of £744.4 million plus 75% of

equivalents and publicly traded marketable securities were $944.2 million and

equity proceeds received by subsidiaries; (iii) a minimum fixed charge cov-

$841.1 million, respectively, and Kennedy-Wilson, Inc. was in compliance with

erage ratio where consolidated EBITDA to consolidated fixed charges not to

these covenants.

be less than 1.5 to 1.0 for the last four quarters; (iv) minimum unsecured

The indentures governing the 2024 Notes and 2042 Notes limit

interest where property level net operating income (“NOI”) and loan asset NOI

Kennedy-Wilson, Inc.’s ability to incur additional indebtedness if, on the date

to interest expense on unsecured debtors not to be less than 1.9 to 1.0 for

of such incurrence and after giving effect to the new indebtedness, Kennedy-

the last four quarters; and (v) a maximum secured recourse indebtedness for

Wilson, Inc.’s maximum balance sheet leverage ratio (as defined in the in-

consolidated secured recourse debt to not exceed 2.5% of total asset value

denture) is greater than 1.50 to 1.00. This ratio is measured at the time of

at any time. As of December 31, 2014, the unsecured credit facility was

incurrence of additional indebtedness. As of December 31, 2014, the balance

undrawn with £225 million available.

sheet leverage ratio was 0.92 to 1.00.

K E N N E D Y - W I L S O N

H O L D I N G S ,

I N C .

OFF-BALANCE SHEET ARRANGEMENTS Guarantees We have provided guarantees associated with loans secured by assets held in various unconsolidated investments. The maximum potential amount of future payments (undiscounted) we could be required to make under the guarantees was approximately $54.9 million at December 31, 2014. The guarantees expire by the year end of 2021 and our performance under the guarantees would be required to the extent there is a shortfall in liquidation between the principal amount of the loan and the net sales proceeds of the property. If we were to become obligated to perform on these guarantees, it could have an adverse effect on our financial condition. As of December 31, 2014, we have unfulfilled capital commitments totaling $33.1 million to our unconsolidated investments. As we identify investment opportunities in the future, we may be called upon to contribute additional capital to unconsolidated investments in satisfaction of our capital commitment obligations.

Our exposure to market risk from changing prices consists primarily of fluctuations in rental rates of commercial and residential properties, market interest rates on residential mortgages and debt obligations and real estate property values. The revenues associated with the commercial services businesses are impacted by fluctuations in interest rates, lease rates, real property values and the availability of space and competition in the market place. Commercial service revenues are derived from a broad range of services that are primarily transaction driven and are therefore volatile in nature and highly competitive. The revenues of the property management operations with respect to rental properties are highly dependent upon the aggregate rents of the properties managed, which are affected by rental rates and building occupancy rates. Rental rate increases are dependent upon market conditions and the competitive environments in the respective locations of the properties. Employee compensation is the principal cost element of property management. To the extent that we engage in development activities, we may have exposure to changing prices in materials or cost of labor.

Most of our real estate properties within our equity partnerships are encum-

QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK

bered by traditional non-recourse debt obligations. In connection with most of

The primary market risk exposure of our Company relates to changes in inter-

these loans, however, we entered into certain “non-recourse carve out” guar-

est rates in connection with our short-term borrowings, some of which bear

antees, which provide for the loans to become partially or fully recourse against

interest at variable rates based on the lender’s base rate, prime rate, EURIBOR,

us if certain triggering events occur. Although these events are different for

GBP LIBOR, or LIBOR plus an applicable borrowing margin. These borrowings

each guarantee, some of the common events include:

do not give rise to a significant interest rate risk because they have short ma-

Non-Recourse Carve Out Guarantees

s the special purpose property-owning subsidiary’s filing a voluntary petition for bankruptcy;

turities. However, the amount of income or loss we recognize for unconsolidat-

s the special purpose property-owning subsidiary’s failure to maintain its status as a special purpose entity; and

the impact from the changes in rates has not been significant. Our exposure to

s subject to certain conditions, the special purpose property-owning subsidiary’s failure to obtain lender’s written consent prior to any subordinate

to our international operations, which has grown due to the Company’s growth

financing or other voluntary lien encumbering the associated property.

currency exchange rate changes in connection with our international invest-

In the event that any of these triggering events occur and the loans become

ments and enter into foreign currency exchange swap, option and forward

ed joint ventures may be impacted by changes in interest rates. Historically, market risk also consists of foreign currency exchange rate fluctuations related of international investments. The Company routinely monitors our exposure to

partially or fully recourse against us, our business, financial condition, results

contracts to limit our exposure to such transactions, as appropriate.

of operations and common stock price could be materially adversely affected.

Interest Rate Risk

In addition, other items that are customarily recourse to a non-recourse

We have established an interest rate management policy, which attempts to

carve out guarantor include, but are not limited to, the payment of real property

minimize our overall cost of debt while taking into consideration the earnings

taxes, liens which are senior to the mortgage loan and outstanding security

implications associated with the volatility of short-term interest rates. As part

deposits.

of this policy, we have elected to maintain a combination of variable and fixed

IMPACT OF INFLATION AND CHANGING PRICES Inflation has not had a significant impact on the results of operations of our company in recent years.

rate debt. As of December 31, 2014, 43% of our consolidated property level debt is fixed rate, 38% is floating rate with interest caps and 19% is floating rate without interest caps.

P A G E

4 7

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) The table below represents contractual balances of our financial instruments at the expected maturity dates as well as the fair value as of December 31, 2014. The expected maturity categories take into consideration actual amortization of principal and do not take into consideration reinvestment of cash. The weighted average interest rate for the various assets and liabilities presented are actual as of December 31, 2014. We closely monitor the fluctuation in interest rates, and if rates were to increase significantly, we believe that we would be able to either hedge the change in the interest rate or refinance the loans with fixed interest rate debt. All instruments included in this analysis are non-trading. Principal Maturing in:

2015

(dollars in millions)

Interest rate sensitive assets Cash equivalents Average interest rate Fixed rate receivables Average interest rate(1) Variable rate receivables

$ 937.7 $ 0.30% 301.4 10.50% —

Average interest rate Total

—% $1,239.1

Weighted average interest rate(1) Interest rate sensitive liabilities Variable rate borrowings Average interest rate

$

$

Average interest rate

5.00% $

2018

— $ — $ —% —% 6.1 5.9 6.26% 2.16% — —

6.1

—% $

6.26%

5.9

$

2.16%

2019

— $ —% — —% —

— —% — —% —

—%

—%

— $

—

—%

—%

90.2 $ 155.4 $ 74.9 $ 55.8 $ 943.0 5.47% 2.94% 3.01% 4.08% 2.45% 2.9

Total

2017

—%

0.41%

Fixed rate borrowings

Weighted average interest rate

2016

93.1

12.0

57.5

23.7

6.75%

1.61%

3.60%

$ 167.4

5.46%

$ 132.4

3.21%

2.40%

102.2 4.38%

$79.5 $1,045.2 3.94%

2.64%

Thereafter

$

— $ 937.7 —% 0.30% — 313.4 —% 7.08% — — —%

$

— —%

$

Total

4.62% $1,492.9 4.54%

$ 937.7 — 313.4 — —

—% $1,251.1

— $1,251.1

0.46%

50.2 $1,369.5 2.24% 2.79%

1,442.7

Fair Value December 31, 2014

$1,383.9 —

1,641.0

1,660.9

4.50% $3,010.5

— $3,044.8

3.72%

(1) Interest rate sensitive assets’ weighted average interest rates are exclusive of non-performing receivables

CRITICAL ACCOUNTING POLICIES Basis of Presentation—The consolidated financial statements include the accounts of ourselves and voting interest entities which we control. All significant intercompany balances and transactions have been eliminated in consolidation. In addition, we evaluate our relationships with other entities to identify whether they are variable interest entities (“VIE”) as defined by Financial Ac-

control, or entities which are VIEs in which we are not the primary beneficiary are accounted for under the equity method. Accordingly, our share of the earnings from these equity-method basis companies are included in our consolidated statements of operations. As of December 31, 2014, we had an investment in one unconsolidated subsidiary which is a VIE in which we are not the primary beneficiary and therefore account for them under the equity method.

counting Standards Board (“FASB”) Accounting Standards Codification (“ASC”)

Revenue Recognition—Revenue consists of management and leasing fees

Subtopic 810 – Consolidation and to assess whether we are the primary ben-

(including performance fees), commissions, rental and hotel income, sales of

eficiary of such entities. In determining whether we are the primary beneficiary

real estate and loan income.

of a VIE, qualitative and quantitative factors are considered, including, but not

Management fees are primarily comprised of investment management,

limited to: the amount and characteristics of our investments; the obligation or

property services, and research fees. Investment management fees are

likelihood for us to provide financial support; and our ability to control or sig-

earned from KWE and from limited partners of funds, co-investments, or

nificantly influence key decisions for the VIE. Significant judgments related to

separate accounts and are generally based on a fixed percentage of com-

these determinations include estimates about the current future fair values and

mitted capital or net asset value. Property services fees are earned for man-

performance of real estate held by these VIEs and general market conditions.

aging the operations of real estate assets and are generally based on a fixed

As of December 31, 2014, Kennedy Wilson has one VIE that is treated as an

percentage of the revenues generated from the respective real estate assets.

unconsolidated investments as discussed in the policy below.

Research fees are earned from consulting arrangements. These fees are

Our investments in unconsolidated subsidiaries in which we have the ability to exercise significant influence over operating and financial policies, but do not

P A G E

4 8

recognized as revenue ratably over the period that the respective services are performed.

Performance fees or carried interest are allocated to the general partner,

Acquisition fees are earned for identifying and closing investments on be-

special limited partner or asset manager of Kennedy Wilson’s real estate

half of investors and are based on a fixed percentage of the acquisition

funds and loan pool participations based on the cumulative performance of

price. Acquisition fees are recognized upon the successful completion of

the fund and loan pools and are subject to preferred return thresholds of

an acquisition after all required services have been performed. In the case

the limited partners and participants. At the end of each reporting period,

of auction and real estate sales commissions, the revenue is generally

Kennedy Wilson calculates the performance fee that would be due as if

recognized when escrow closes. In accordance with the guidelines estab-

the fair value of the underlying investments were realized as of such date,

lished for Reporting Revenue Gross as a Principal versus Net as an Agent

irrespective of whether such amounts have been realized. As the fair value

in the ASC Subtopic 605-45, KW Group records commission revenues and

of underlying investments varies between reporting periods, it is necessary

expenses on a gross basis. Of the criteria listed in the Subtopic 605-45,

to make adjustments to amounts recorded as performance fees to reflect

Kennedy Wilson is the primary obligor in the transaction, does not have

either (a) positive performance resulting in an increase in the performance

inventory risk, performs all or part of the service, has credit risk, and has

fee allocated to the general partner or asset manager or (b) negative per-

wide latitude in establishing the price of services rendered and discretion

formance that would cause the amount due to Kennedy Wilson to be less

in selection of agents and determination of service specifications. Leasing

than the amount previously recognized as revenue, resulting in a negative

fees that are payable upon tenant occupancy, payment of rent or other

adjustment to performance fees allocated to the general partner or asset

events beyond Kennedy Wilson’s control are recognized upon the occur-

manager. Substantially all of the performance fees are recognized in in-

rence of such events.

vestment management fees and substantially all of the carried interest

Rental income from operating leases is generally recognized on a straight-

is recognized in income from unconsolidated investments in our consol-

line basis over the terms of the leases. Hotel income is earned when rooms

idated statements of operations. Total performances fees recognized to

are occupied or goods and services have been delivered or rendered.

date through December 31, 2014 that may be reversed in future periods

Sales of real estate are recognized when title to the real property passes to

if there is negative fund performance totaled $15.8 million. Performance

the buyer and there is no continuing involvement in the real property. KW Group

fees recognized during the years ended December 31, 2014, 2013, and

follows the requirements for profit recognition as set forth by the Sale of Real

2012 were $8.5 million, $17.5 million and $8.6 million and are included

Estate ASC Subtopic 360-20.

in accounts receivable—related parties in the accompanying consolidated balance sheet.

Interest income from investments in loans acquired at a discount are recognized using the effective interest method. Interest income from invest-

KWE is externally managed by one of our wholly-owned subsidiaries

ments in loans which KW Group originates are recognized at the stated in-

(“KWE Manager”) pursuant to an investment management agreement

terest rate. When a loan or loans are acquired with deteriorated credit quality

in which Kennedy Wilson will be entitled to receive certain management

primarily for the rewards of collateral ownership, such loans are accounted

and performance fees. KWE Manager is paid an annual management fee

for as loans until KW Group is in possession of the collateral. However, ac-

(payable quarterly in arrears) equal to 1% of KWE’s adjusted net asset value

crual of income is not recorded during the conversion period under ASC Sub-

(EPRA NAV). The management fee payable to KWE Manager is paid half in

topic 310-30-25. Income is recognized to the extent that cash is received

cash and half in shares of KWE. KW Manager earned $14.0 million in man-

from the loan.

agement fees which is eliminated in consolidation due to our consolidation

Real Estate Acquisitions—When acquiring a property, the purchase price

of KWE.

of acquired properties is recorded to land, buildings and building improve-

A wholly-owned subsidiary of Kennedy Wilson is also entitled to receive

ments and intangible lease value (value of above-market and below-mar-

an annual performance fee equal to 20% of the lesser of (i) the excess of

ket leases, acquired in-place lease values, and tenant relationships, if any)

the shareholder return for the relevant year (defined as the change in KWE’s

based on their respective estimated fair values in accordance with Busi-

adjusted net asset value per ordinary share) over a 10% annual return hurdle,

ness Combinations ASC Subtopics 805-10. Acquisition-related costs are

and (ii) the excess of year-end adjusted net asset value per ordinary share

expensed as incurred.

over a “high water mark.” The performance fee is payable in shares of KWE

The valuations of real estate are based on management estimates of the

that vest equally over a three-year period. No such fee has been earned by

real estate assets using income and market approaches. The indebtedness

Kennedy Wilson as of December 31, 2014. If earned, these fees would also be

securing the real estate are valued, in part, based on third party valuations and

eliminated in consolidation.

management estimates also using an income approach.

Commissions primarily consist of acquisition fees, auction and real estate sales commissions, leasing commissions, and consulting fees.

K E N N E D Y - W I L S O N

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) Noncontrolling Interests—Noncontrolling interests are reported within equi-

has occurred in accordance with Equity Method Investments ASC Subtopic

ty as a separate component of Kennedy Wilson’s equity in accordance with

323-10. As of December 31, 2014, the Company also had an investment in a

Noncontrolling Interests in Consolidated Financial Statements ASC Subtopic

joint venture which is a VIE in which the Company is not the primary beneficiary

810-10. Revenues, expenses, gains, losses, net income or loss, and other

and therefore accounts for it under the equity method as well.

comprehensive income are reported in the consolidated statements of opera-

Profits on the sale of real estate held by unconsolidated investments in

tions at the consolidated amounts and net income and comprehensive income

which KW Group has continuing involvement are deferred until such time that

attributable to noncontrolling interests are separately stated. Due to the launch

the continuing involvement has been concluded and all the risks and rewards

and consolidation of KWE and the Company’s 14.9% ownership there has

of ownership have passed to the buyer. Profit on sales to unconsolidated in-

been a large increase in noncontrolling interest during 2014. Management

vestment in which KW Group retains an equity ownership interest results in

fees earned by KWE Manger for managing KWE are eliminated in consolidation

partial sales treatment in accordance with Sale of Real Estate ASC Subtopic

however the amount attributable to the noncontrolling interest holders of KWE

360-20, thus deferring a portion of the gain as a result of KW Group’s continu-

are recognized through net income (loss) attributable to noncontrolling interest

ing ownership percentage in the unconsolidated investment.

holders.

The Company has three investments in joint ventures, KW Property Fund III,

Foreign Currencies—The financial statements of subsidiaries located outside

L.P. (“KW Fund III”), Kennedy Wilson Real Estate Fund IV, L.P. (“Fund IV”) and

the United States are measured using the local currency as the functional

Kennedy Wilson Real Estate Fund V, L.P. (“Fund V”) (collectively the “Funds”)

currency. The assets and liabilities of these subsidiaries are translated at the

that are investment companies under the Investment Companies ASC Subtopic

rates of exchange at the balance sheet date, and income and expenses are

946-10. Thus, the Funds reflect their investments at fair value, with unrealized

translated at the average monthly rate. The foreign currencies include the Euro,

gains and losses resulting from changes in fair value reflected in their earnings.

the British pound sterling, and the Japanese yen. Cumulative translation ad-

Kennedy Wilson has retained the specialized accounting for the Funds pursu-

justments, to the extent not included in cumulative net income, are included in

ant to Retention of Specialized Accounting for Investments in Consolidation

the consolidated statements of equity and comprehensive income as a com-

ASC Subtopic 810-10 in recording its equity in joint venture income from the

ponent of accumulated other comprehensive income. The Company hedges

Funds.

its investments in foreign subsidiaries with forward and option contracts as

Additionally, Kennedy Wilson elected the fair value option for three investments in unconsolidated investment entities. Kennedy Wilson elected to record

discussed below. Derivative Instruments And Hedging—KW Group holds derivatives to reduce our exposure to foreign currencies. We recognize all derivatives on the balance sheet at fair value. Derivatives that are not hedges must be adjusted to fair value and the changes in fair value must be reflected as income or expense. If the derivative qualifies for hedge accounting, depending on the nature of the hedge, changes in the fair value of derivatives are either offset against the change in fair value of the hedged assets, liabilities, or firm commitments through earnings or recognized in other comprehensive income, which is a component of the stockholders’ equity accounts. The ineffective portion of a derivative’s change in fair value is immediately recognized in earnings.

these investments at fair value to more accurately reflect the timing of the value created in the underlying investments and report those results in current operations. Interest income from investments in loan pool participations are recognized on a level yield basis under the provisions of Loans and Debt Securities Acquired with Deteriorated Credit Quality ASC Subtopic 310-30, where a level yield model is utilized to determine a yield rate which, based upon projected future cash flows, accretes interest income over the estimated holding period. In the event that the present value of those future cash flows is less than net book value, a loss would be immediately recorded. When the future cash flows of a note cannot be reasonably estimated, cash payments are applied to the

Unconsolidated Investments—KW Group has a number of joint venture inter-

cost basis of the note until it is fully recovered before any interest income is

ests that were formed to acquire, manage, and/or sell real estate and invest

recognized.

in loan pools and discounted loan portfolios. Investments in unconsolidated investments are accounted for under the equity method of accounting as KW Group can exercise significant influence, but does not have the ability to control the unconsolidated investment. An investment in an unconsolidated investment is recorded at its initial investment and is increased or decreased by KW Group’s share of income or loss, plus additional contributions and less distributions. A decline in the value of an unconsolidated investment that is other than temporary is recognized when evidence indicates that such a decline

K E N N E D Y - W I L S O N

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Income Taxes—Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered

or settled. The effect on deferred tax assets and liabilities of a change in tax

costs for share-based payment arrangements that have been modified are

rates is recognized in income in the period that includes the enactment date.

recognized over the original service or performance period.

In accordance with Accounting for Uncertainty in Income Taxes ASC Subtopic 740-10, Kennedy Wilson recognizes the effect of income tax positions only if

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

those positions are more likely than not of being sustained. Recognized income

On April 10, 2014, the FASB issued ASU 2014-08, which amends the defini-

tax positions are measured at the largest amount that is greater than 50%

tion of discontinued operations and requires additional disclosures for disposal

likely of being realized. Changes in recognition or measurement are reflected

transactions that do not meet the revised discontinued operations criteria. ASU

in the period in which the change in judgment occurs.

2014-08 is required to be adopted for fiscal years beginning after December

Kennedy Wilson records interest related to unrecognized tax benefits in interest expense and penalties in general and administrative expenses. Share-Based Payment Arrangements—Kennedy Wilson accounts for its sharebased payment arrangements under the provisions of Share-Based Payments ASC Subtopic 718-10. Compensation cost for employee service received in exchange for an award of equity instruments is based on the grant-date fair value of the share-based award that is ultimately settled in equity of Kennedy Wilson. The cost of employee services is recognized over the period during which an employee provides service in exchange for the share-based payment award. Share-based payment arrangements with only services conditions that vest ratably over the requisite service period are recognized on the straight-line basis and performance awards that vest ratably are recognized on a trancheby-tranche basis over the performance period. Unrecognized compensation

15, 2014, with early adoption permitted. Our early adoption of this pronouncement on January 1, 2014 did not have a material impact on KW Group’s consolidated financial statements. In May 2014, the FASB issued an accounting standard update that will use a five-step model to recognize revenue from customer contracts in an effort to increase consistency and comparability throughout global capital markets and across industries. The model will identify the contract, identify any separate performance obligations in the contract, determine the transaction price, allocate the transaction price and recognize revenue when the performance obligation is satisfied. The new standard will replace most existing revenue recognition in GAAP when it becomes effective for the Company on January 1, 2017. We have not yet selected a transition method nor have we determined the effect of the standard on our ongoing financial reporting.

P A G E

5 1

EXECUTIVE OFFICERS AND DIRECTORS

William J. McMorrow—Chairman and Chief Executive Officer. Mr. McMorrow joined

Matt Windisch—Executive Vice President. Mr. Windisch has served as the Com-

the Company in 1988 and has been Chairman and Chief Executive Officer of the

pany’s Executive Vice President since 2012. He joined the Company in 2006 and

Company since 1988. Mr. McMorrow is the architect of the Company’s expansion

heads the Company’s U.S. note business, its research subsidiary and its real

into real estate brokerage, property management and investment services. In addi-

estate activities in Japan. In addition, Mr. Windisch leads the Company’s corpo-

tion to his real estate experience, Mr. McMorrow has more than 17 years of bank-

rate and transaction capital raising, strategic planning and acquisitions analy-

ing experience. Prior to joining the Company, he was the Executive Vice President

sis activities. He is also responsible for maintaining the Company’s key investor

and Chairman of the Credit Policy Committee at Imperial Bancorp and also has

and banking relationships. Mr. Windisch serves on the boards of the Company’s

held senior positions with a variety of financial services companies, including eight

subsidiaries in Ireland and Japan. He serves as co-chairman of the Company’s

years as a Senior Vice President of Fidelity Bank. Mr. McMorrow also serves on the

Investment Committee, which evaluates and approves all of the Company’s

board of directors of Kennedy Wilson Europe Real Estate plc (LSE: KWE), a company

investments. Prior to joining the Company, Mr. Windisch was an associate at

that is externally managed by a subsidiary of the Company and is the co-chairman

JP Morgan Chase, where he held positions in investment banking, strategy and

of the Company’s investment committee. He received a B.S. in Business and an

risk management. Mr. Windisch received a B.B.A. in Finance and Accounting from

M.B.A. from the University of Southern California. Mr. McMorrow is on the Executive

Emory University and an M.B.A. from UCLA’s Anderson School of Management.

Board of the USC Lusk Center for Real Estate and is involved in numerous charities

Kent Mouton—Director and General Counsel. Mr. Mouton joined the Company in

in Southern California, including Chrysalis, the Rape Treatment Center, the Village

2011 as the Company’s General Counsel. As General Counsel, Mr. Mouton over-

School and Loyola High School. In 2014, Mr. McMorrow received City of Hope's

sees all legal affairs of the Company and participates in corporate compliance and

Spirit of Life Award at the Los Angeles Real Estate and Construction Industries

risk management oversight. Mr. Mouton has served as a director of the Company

Council's 2014 Celebration. Mr. McMorrow was selected to serve as a member of

since 1995 and currently serves on the Company’s investment committee. Prior to

our Board of Directors because of his significant achievements with, and intimate

joining the Company, Mr. Mouton was a co-owner and managing partner of Kulik,

knowledge of, the Company and his extensive experience in banking and real estate.

Gottesman, Mouton & Siegel LLP, a real estate, business and entertainment law

Justin Enbody—Chief Financial Officer. Justin Enbody is Chief Financial Officer

firm in Los Angeles. His practice included negotiating, structuring and documenting

of the Company. He has held this position since 2012. He is responsible for all

transactions in commercial real estate acquisitions and dispositions, financing, joint

aspects of finance and administration for the Company, including strategic plan-

ventures and syndications, leasing and development and general corporate matters.

ning, financial reporting and risk management. He also serves on the Compa-

Mr. Mouton graduated from the University of California, Los Angeles with a Bache-

ny’s investment committee, which evaluates and approves all of the Company’s

lor of Arts degree in Economics (Summa Cum Laude, Phi Beta Kappa and Dean's

investments. Mr. Enbody joined the Company in September 2009 and was the

List) and received his law degree from the University of California, Los Angeles.

Company’s Controller before becoming Chief Financial Officer. Prior to joining

Mr. Mouton is a member of the bar associations of the State of California and Los

the Company, Mr. Enbody was a senior consultant with RAFS Inc., an indepen-

Angeles County and was an adjunct professor of real estate law at UCLA Extension

dent financial consulting company which he joined in 2004. Prior to RAFS Inc.,

for 27 years. In 2012, the Los Angeles Daily Journal named Mr. Mouton as one of the

Mr. Enbody was a senior associate with KPMG LLP. Mr. Enbody received his

top 30 real estate lawyers in the State of California. Mr. Mouton was selected to serve

Bachelor of Arts from the University of California at Santa Barbara.

as a member of our Board of Directors because of his experience and knowledge

Mary Ricks—President and CEO, Kennedy Wilson Europe. Mary Ricks is President and CEO of Kennedy Wilson Europe. She joined Kennedy Wilson in 1990 and before assuming her current role in 2011, headed the Company’s commercial

relating to the legal and financial aspects of real estate investment and his significant experience in public and private company advisory and governance activities. In Ku Lee—Senior Vice President, Deputy General Counsel and Secretary.

investment group since 2002. Kennedy Wilson Europe was established in 2011.

Mr. Lee joined the Company in 2013 as the Company’s Senior Vice President,

Ms. Ricks also serves on the board of directors of Kennedy Wilson Europe Real

Deputy General Counsel and Secretary of the Company. He is in charge of all

Estate plc (LSE: KWE), a company that is externally managed by a subsidiary of the

of the Company’s public company regulatory and corporate governance mat-

Company and on the Company’s investment committee. Prior to joining Kennedy

ters and currently serves as the Chief Compliance Officer of KW Investment

Wilson, Ms. Ricks was a commercial broker at the Hanes Company. In 2014,

Adviser, LLC. Mr. Lee is also responsible for all legal aspects of the Company’s

Ms. Ricks was selected by PERE as Industry Figure of the Year, Europe. She has

corporate and transaction capital raising, including public and private offerings

been named by the L.A. Business Journal as one of the top women in commercial

of equity and debt. Prior to joining Kennedy Wilson, Mr. Lee served as global

real estate and was featured on the covers of Forum Magazine and Real Estate

corporate counsel at SK Telecom / SK Planet from 2011 to 2013, where he was

California recognizing women at the top of the field. She received a B.A. in Sociol-

the lead counsel on multiple cross-border transactions. Prior to such position,

ogy from UCLA, where she was an All-American athlete. Ms. Ricks is a founding

Mr. Lee was a senior associate at Latham & Watkins LLP. Mr. Lee received

board member of the Richard S. Ziman Center for Real Estate at UCLA.

his J.D. from Cornell Law School and his B.A. in Economics from Occidental

P A G E

5 2

College. Mr. Lee is a member of the bar associations of the State of California

estate and service industries. He consults frequently with high net worth individuals

and Los Angeles County.

and families in tax and transactional planning. Mr. Solomon was selected to serve

David A. Minella—Director. Mr. Minella is currently the CEO of Aligned Asset Managers LLC (“Aligned”), a financial services holding company investing in the asset management industry sponsored by GTCR. Aligned’s first acquisition was

as a member of our Board of Directors because of his significant experience in the public accounting profession, particularly in the real estate and services industries, and with public and private company advisory and governance activities.

a majority interest in The Townsend Group based in Cleveland, OH. Mr. Minella

Norman Creighton—Director. Mr. Creighton has served as a director of the Com-

served as Prospect Acquisition Corp’s. Chairman and Chief Executive Officer from

pany since 2004. From 1975 to 2001, Mr. Creighton was employed with Imperial

its inception in July 2007 through November 2009 and has served as a director of

Bank, serving as President and Chief Executive Officer from 1983 to 2001. During

the Company since November 2007. Between 1997 and March 2007, Mr. Minella

Mr. Creighton’s tenure with Imperial Bank, its assets increased from approximately

served as the Chief Executive Officer and a director of Value Asset Management

$200 million in 1975 to approximately $7 billion in 2001. Prior to Imperial Bank, Mr.

LLC (“VAM”), a strategic investment management holding company. At VAM,

Creighton served as Regional Vice President for Southern Arizona of Great Western

Mr. Minella was responsible for its overall business strategy, acquisitions and

Bank from 1971 to 1974. From 1958 to 1971, Mr. Creighton was employed with

financial results. Under Mr. Minella’s leadership, VAM acquired a controlling in-

Arizona Bank, including as Manager of the Tucson Headquarters. Mr. Creighton is

terest in five separate investment management firms: Dalton Hartman Greiner

currently a member of the board of directors of Square 1 Bank. Mr. Creighton holds

and Maher, New York, NY; Harris Bretall Sullivan and Smith, San Francisco, CA;

a B.S. in banking and finance from the University of Montana. Mr. Creighton was

Hillview Capital Advisors, LLC, New York, NY; Grosvenor Capital Management

selected to serve as a member of our Board of Directors because of his extensive

LP, Chicago IL; and MDT Advisers LLC, Cambridge, MA. All of the original ac-

experience and knowledge of business, accounting and the banking industry.

quisitions have been sold. From 1995 to 1997, Mr. Minella was the President

Cathy Hendrickson—Director. Ms. Hendrickson has served as a director of the

and Chief Executive Officer of the asset management division of Liechtenstein

Company since 2004. Ms. Hendrickson has 44 years of experience in commercial

Global Trust, or LGT, a wealth and asset management firm, where he was re-

banking. From May of 1993 until September of 2010, Ms. Hendrickson served as

sponsible for the overall business strategy and financial results. During

President and Chief Executive Officer of Bay Cities National Bank. Ms. Hendrickson

Mr. Minella’s tenure as LGT’s Chief Executive Officer, he also led LGT’s acquisi-

concurrently served as President and Chief Executive Officer of Peninsula Banking

tion of Chancellor Capital Management, a large United States equity investment

Group, Inc. and sat on the boards of Bay Cities National Bank, Peninsula Banking

firm. Mr. Minella originally joined the LGT group in 1987 as the head of its United

Group, and Community First Financial Group, Inc. Ms. Hendrickson was selected to

States subsidiaries, GT Capital Management and GT Global. Mr. Minella estab-

serve as a member of our Board of Directors because of her extensive experience

lished its United States mutual fund business through the broker-dealer commu-

as a high level executive in the banking and financial industries.

nity, reestablished LGT’s institutional separate account capabilities, and developed the firm’s global equity sector expertise. Mr. Minella is a member of the Executive Council at Bunker Hill Capital Management, a private equity firm in Boston, Massachusetts, the former Chairman of the board of directors of MDT Advisers LLC and a former board member of the Investment Company Institute. Mr. Minella holds a B.S. in accounting from Bentley College. Mr. Minella was selected to serve as a member of our Board of Directors because of his significant financial industry experience, particularly relating to investment strategies and asset management.

Stanley R. Zax—Director. Mr. Zax has served as a director of the Company since 2010. Mr. Zax was the Chairman and CEO of Zenith National Insurance Corp. (“Zenith”), a company engaged in insurance and reinsurance, from l977 to 2012. Zenith, a NYSE listed company, was acquired by Fairfax Financial Holdings Limited in 2010. Currently, Mr. Zax serves as director of The Center for The Study of the Presidency and Congress in Washington, D.C., Prostate Cancer Foundation, and First Century Bank, Los Angeles. Mr. Zax started his career in 1961 as an associate and later a partner with the Chicago law firm Friedman,

Jerry R. Solomon—Director. Mr. Solomon has served as a director of the Company

Mulligan, Dillon & Uris and subsequently joined Hilton Hotels, where he served

since 2001. Mr. Solomon received both his B.S. Degree in accounting (1973) and

as Vice President, General Counsel, Director and Secretary. His association with

an M.B.A. (1974) from UC Berkeley. Throughout college and following graduation,

the insurance industry started in 1973, when he served as President and Chief

he worked in the tax department of JK Lasser & Company that later became Touche

Executive of Great American Insurance Company. He served as a Director of

Ross & Company. After leaving JK Lasser, Mr. Solomon joined a large local CPA firm

Wynn Resorts Ltd., a holding company of Wynn Las Vegas, and Wynn Macao

where he became the partner in charge of the comprehensive business services

from October 2002 to May 8, 2007, and Chairman of its Audit Committee. He

department as well as the administrative partner in charge of seven partners and

served as a Non-Executive Director of Advent Capital (Holdings) Plc, London,

80 staff. In 1988 he formed Solomon & Company CPA’s Inc. that later merged with

England from 1999 to November 10, 2005. Mr. Zax earned a JD in 1961 and a

Harold G. Winnett and the firm was renamed Solomon, Winnett & Rosenfield Certi-

BBA in 1958 from the University of Michigan at Ann Arbor. Mr. Zax was selected

fied Public Accountants, Inc. In 2014, Mr. Solomon left the firm of Solomon, Winnett

to serve as a member of our Board of Directors because of his extensive experi-

& Rosenfield and has started an independent practice specializing in both the real

ence relating to the management and operations of public companies.

K E N N E D Y - W I L S O N

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Stockholders

of their operations and their cash flows for each of the years in the three-year

Kennedy-Wilson Holdings, Inc.:

period ended December 31, 2014, in conformity with U.S. generally accept-

We have audited the accompanying consolidated balance sheets of Kennedy-Wilson Holdings, Inc. and subsidiaries (the Company) as of December 31, 2014 and 2013, and the related consolidated statements of operations, comprehensive income, equity and cash flows for each of the years in the three-

ed accounting principles. Also in our opinion, the related financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein.

year period ended December 31, 2014. In connection with our audits of the

As discussed in note 2 to the consolidated financial statements, the Company

consolidated financial statements, we also have audited financial statement

changed its method for reporting discontinued operations in 2014 due to the

schedules III to IV. These consolidated financial statements and financial state-

adoption of FASB Accounting Standards Update No. 2014-08, Presentation of

ment schedules are the responsibility of the Company’s management. Our re-

Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic

sponsibility is to express an opinion on these consolidated financial statements

360): Reporting Discontinued Operations and Disclosures of Disposals of Com-

and financial statement schedules based on our audits.

ponents of an Entity.

We conducted our audits in accordance with the standards of the Public Com-

We also have audited, in accordance with the standards of the Public Company

pany Accounting Oversight Board (United States). Those standards require that

Accounting Oversight Board (United States), Kennedy-Wilson Holdings, Inc.’s

we plan and perform the audit to obtain reasonable assurance about whether

internal control over financial reporting as of December 31, 2014, based on

the financial statements are free of material misstatement. An audit includes

criteria established in Internal Control - Integrated Framework issued by the

examining, on a test basis, evidence supporting the amounts and disclosures

Committee of Sponsoring Organizations of the Treadway Commission (2013),

in the financial statements. An audit also includes assessing the accounting

and our report dated March 2, 2015 expressed an unqualified opinion on the

principles used and significant estimates made by management, as well as

effectiveness of the Company’s internal control over financial reporting.

evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Kennedy-Wilson Hold-

Los Angeles, California

ings, Inc. and subsidiaries as of December 31, 2014 and 2013, and the results

March 2, 2015

K E N N E D Y - W I L S O N

H O L D I N G S ,

I N C .

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM The Board of Directors and Stockholders

preparation of financial statements in accordance with generally accepted ac-

Kennedy-Wilson Holdings, Inc.

counting principles, and that receipts and expenditures of the company are be-

We have audited Kennedy-Wilson Holdings, Inc.’s (the Company) internal control over financial reporting as of December 31, 2014, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

ing made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Kennedy-Wilson Holdings, Inc.’s management is responsible for maintaining

Because of its inherent limitations, internal control over financial reporting may

effective internal control over financial reporting and for its assessment of the

not prevent or detect misstatements. Also, projections of any evaluation of ef-

effectiveness of internal control over financial reporting. Our responsibility is to

fectiveness to future periods are subject to the risk that controls may become

express an opinion on the Company’s internal control over financial reporting

inadequate because of changes in conditions, or that the degree of compliance

based on our audit.

with the policies or procedures may deteriorate.

We conducted our audit in accordance with the standards of the Public Com-

In our opinion, Kennedy-Wilson Holdings, Inc. maintained, in all material re-

pany Accounting Oversight Board (United States). Those standards require that

spects, effective internal control over financial reporting as of December 31,

we plan and perform the audit to obtain reasonable assurance about whether

2014, based on criteria established in Internal Control - Integrated Framework

effective internal control over financial reporting was maintained in all material

(2013) issued by the Committee of Sponsoring Organizations of the Treadway

respects. Our audit included obtaining an understanding of internal control over

Commission (COSO).

financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Kennedy-Wilson Holdings, Inc. and subsidiaries as of December 31, 2014 and 2013, and the related consolidated statements of operations, comprehensive income, equity and cash flows for each of the years in the three-year period end-

A company’s internal control over financial reporting is a process designed to

ed December 31, 2014 as well as the financial statement schedules III and IV,

provide reasonable assurance regarding the reliability of financial reporting and

and our report dated March 2, 2015 expressed an unqualified opinion on those

the preparation of financial statements for external purposes in accordance with

consolidated financial statements and schedules.

generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide

Los Angeles, California

reasonable assurance that transactions are recorded as necessary to permit

March 2, 2015

P A G E

5 5

CONSOLIDATED BALANCE SHEETS

December 31,

2014

2013

$ 174.6 763.1 55.6 4,228.1 492.2 313.4

$ 170.2 8.0 16.6 688.1 786.1 56.8

305.1

73.0

6,332.1

1,798.8

$ 264.9 702.4 2,195.9 125.0

$ 129.1 409.0 401.8 —

Junior subordinated

—

40.0

Total liabilities

(dollars in millions except per share data)

Assets Cash and cash equivalents Cash held by consolidated investments Accounts receivable (including $18.0 and $11.4 of related party) Real estate and acquired in place lease values, net of accumulated depreciation and amortization Unconsolidated investments Loans (including $0 and $4.1 of related party) Other assets Total assets Liabilities Accounts payable, accrued expenses and other liabilities Senior notes payable Investment debt Line of Credit

3,288.2

979.9

Equity Cumulative preferred stock, $0.0001 par value: 1,000,000 shares authorized $1,000 per share liquidation preference Common Stock, 96,091,446 and 82,592,607 shares issued outstanding as of December 31, 2014 and December 31, 2013 Additional paid-in capital

— — 991.3

— — 801.3

Retained earnings (accumulated deficit)

(62.0)

(42.2)

Accumulated other comprehensive (loss) income

(28.2)

9.2

901.1

768.3

2,142.8

50.6

Total Kennedy-Wilson Holdings, Inc. shareholders’ equity Noncontrolling interests Total equity Total liabilities and equity

See accompanying notes to consolidated financial statements.

P A G E

5 6

3,043.9

818.9

$6,332.1

$1,798.8

CONSOLIDATED STATEMENTS OF OPERATIONS

Year ended December 31,

2014

2013

2012

82.6 270.2 17.4 28.4

$ 68.1 43.0 1.9 10.1

$ 53.3 8.5 2.8 2.3

398.6

123.1

66.9

Commission and marketing expenses Rental and hotel operating expense Cost of real estate sold Compensation and related expenses General and administrative Depreciation and amortization

5.6 116.4 20.7 113.8 42.1 104.5

3.6 18.9 7.9 76.7 24.6 17.4

4.6 4.5 2.2 55.8 19.5 4.9

Total operating expenses Income from unconsolidated investments

403.1 54.2

149.1 41.4

91.5 27.9

49.7

15.4

3.3

218.1 (19.7) (46.3) (57.1) (27.3)

56.6 (1.6) (11.8) (39.9) —

25.5 (0.7) (2.5) (26.1) —

5.1

(1.9)

7.0 6.5

(dollars in millions, except per share data)

Revenue Investment management, property services, and research fees (includes $57.4, $46.0, and $32.5 of related party fees) Rental and hotel Loans and other income Sale of real estate

$

Total revenue Operating expenses

Operating income (loss) Non-operating income (expense) Acquisition-related gains Acquisition-related expenses Interest expense - investment Interest expense - corporate debt Early extinguishment of corporate debt Other income (expense)

122.5

16.8

(Provision for) benefit from income taxes

Income before (provision for) benefit from income taxes

(32.4)

(2.9)

0.2

Net income Net (income) attributable to the noncontrolling interests Preferred stock dividends and accretion of issuance costs

90.1 (68.2) (8.1)

13.9 (20.3) (8.1)

6.7 (2.5) (8.1)

$

13.8

$ (14.5)

$ (3.9)

$

0.14 89,200,855

$ (0.21) 71,159,919

$(0.07) 55,285,833

$0.14

$(0.21)

$(0.07)

91,555,214

71,159,919

55,285,833

0.36

$ 0.28

$ 0.20

Net income (loss) attributable to Kennedy-Wilson Holdings, Inc. common shareholders (a)

Basic Earnings per share Income (loss) per basic Weighted average shares outstanding for basic Diluted Earnings per share (a) Income (loss) per diluted Weighted average shares outstanding for diluted Dividends declared per common share

$

(a) EPS amounts may not add due to rounding.

See accompanying notes to consolidated financial statements.

K E N N E D Y - W I L S O N

H O L D I N G S ,

I N C .

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

Year ended December 31, (dollars in millions)

Net income Other comprehensive income (loss), net of tax: Unrealized gain (loss) on marketable securities Unrealized foreign currency translation (loss) gain Amounts reclassified from accumulated other comprehensive income Unrealized gain (loss) on foreign currency derivatives Total other comprehensive (loss) income for the period

2014

2013

2012

$ 90.1

$13.9

$ 6.7

(0.2) (46.4) (7.1)

— (9.3) 2.8

3.3 (1.5) —

16.3

3.1

5.7

(37.4)

(3.4)

7.5 14.2

Comprehensive income

52.7

10.5

Comprehensive income attributable to noncontrolling interests

(15.6)

(20.3)

(2.6)

$ 37.1

$ (9.8)

$11.6

Comprehensive income (loss) attributable to Kennedy-Wilson Holdings, Inc.

See accompanying notes to consolidated financial statements.

K E N N E D Y - W I L S O N

H O L D I N G S ,

I N C .

CONSOLIDATED STATEMENTS OF EQUITY

Preferred Stock (dollars in millions, except share amounts)

Shares Amount

Balance, January 1, 2012 132,550 Repurchase of 3,400 common shares — Repurchase of 612,900 warrants — Issuance of 8,625,000 shares of common stock — Common stock issued under Amended and Restated 2009 Equity Participation Plan — Stock compensation expense — Other comprehensive income (loss): Unrealized gain on marketable securities, net of tax of $2.3 — Unrealized foreign currency translation loss, net of tax of $1.3 — Unrealized forward contract foreign currency gain, net of tax of $3.7 — Preferred stock dividends — Common stock dividends — Net income — Acquisition of noncontrolling interests — Consolidation of Fund II — Contributions from noncontrolling interests — Distributions to noncontrolling interests —

Total

— — — —

51,825,998 (3,400) — 8,625,000

— — — —

407.3 — (1.6) 106.3

9.7 — — —

5.0 — — —

(11.8) — — —

3.4 — — —

413.6 — (1.6) 106.3

— —

3,175,000 —

— —

— 3.5

— —

— —

— —

— —

— 3.5

— —

— —

— —

— —

— —

3.3 (1.4)

— —

— —

3.3 (1.4)

— — — — — — — —

— — — — 150,000 — — —

— — — — — — — —

— — — — (2.7) — — —

— (8.1) (11.7) 4.2 — — — —

5.7 — — — — — — —

— — — — 2.0 — — —

— — — 2.5 0.1 7.6 0.4 (4.9)

5.7 (8.1) (11.7) 6.7 (0.6) 7.6 0.4 (4.9)

— — — — —

63,772,598 1,771,862 — 17,250,000 —

— — — — —

512.8 15.4 (1.4) 275.9 (9.8)

(5.9) — — — —

12.6 — — — —

(9.8) — — — 9.8

9.1 — — — —

518.8 15.4 (1.4) 275.9 —

—

(10,038)

—

—

—

—

—

—

—

— — — —

(191,815) — — —

— — — —

(3.8) 7.5 4.7 —

— — — —

— — — —

— — — —

— — — —

(3.8) 7.5 4.7 —

—

—

—

—

—

(6.5)

—

—

(6.5)

— — — — — — —

— — — — — — —

— — — — — — —

— — — — — — —

— (8.1) (21.8) (6.4) — — —

3.1 — — — — — —

— — — — — — —

— — — 20.3 20.3 1.4 (0.5)

3.1 (8.1) (21.8) 13.9 20.3 1.4 (0.5)

132,550 — — — — — —

— — — — — — —

82,592,607 9,201,250 3,147,500 1,472,146 (2,475) (319,582) —

— — — — — — —

— — —

— — —

— — —

— — —

801.3 190.6 — — — (8.1) 15.8 — — — —

(42.2) — — — — — — — — — —

9.2 — — — — — — — (46.7) 9.5 (0.2)

— — — — — — — — — — —

50.6 — — — — — — — (94.4) 10.6 —

818.9 190.6 — — — (8.1) 15.8 — (141.1) 20.1 (0.2)

Balance, December 31, 2012 132,550 Exercise of warrants into common shares — Repurchase of 427,332 warrants — Issuance of 17,250,000 shares of common stock — Retirement of common shares held in treasury — Issuance of 136,600 shares of common stock under amended and restated equity participation plan net of 146,638 shares — forfeited Shares retired due to RSG Vesting — Stock compensation expense — RSG plan modification — Other comprehensive income (loss): — Unrealized foreign currency translation loss, net of tax of $4.4 — Unrealized forward contract foreign currency gain, net of tax of $2.1 — Preferred stock dividends — Common stock dividends — Net income — Consolidation of noncontrolling interests (Note 4) — Contributions from noncontrolling interests — Distributions to noncontrolling interests — Balance, December 31, 2013 Issuance of shares, net Shares granted Exercise of Warrants into Common Shares forfeited Shares retired due to RSG Vesting Stock based compensation Other comprehensive income: Unrealized foreign currency translation gain, net of tax Unrealized foreign currency derivative gain, net of tax Unrealized losses on marketable securities, net of tax

Accumulated Other Common Stock Additional Retained Comprehensive Treasury Noncontrolling Income Stock Interests Shares Amount Paid-in Capital Earnings

(continued)

P A G E

5 9

CONSOLIDATED STATEMENTS OF EQUITY

Preferred Stock (dollars in millions, except share amounts)

Preferred stock dividends Common stock dividends Net income (loss) Consolidation of noncontrolling interests Issuance of KWE shares, net Acquisition of Kennedy Wilson Europe (KWE) shares from noncontrolling interest holders Contributions from noncontrolling interests, excluding KWE Distributions to noncontrolling interests Balance, December 31, 2014

Shares Amount

6 0

Retained Accumulated Other Earnings Common Stock Additional (Accumulated Comprehensive Treasury Noncontrolling Shares Amount Paid-in Capital Income Stock Deficit) Interests

Total

— — — — —

— — — — —

— — — — —

— — — — —

— — — — (8.3)

(8.1) (33.6) 21.9 — —

— — — — —

— — — — —

68.2 291.8 1,893.9

(8.1) (33.6) 90.1 291.8 1,885.6

— —

— —

— —

— —

— —

— —

— —

— —

(51.1) 30.9

(51.1) 30.9

—

(57.7)

(57.7)

—

—

—

—

—

—

—

132,550

$—

96,091,446

$—

$ 991.3

$ (62.0)

$(28.2)

See accompanying notes to consolidated financial statements.

P A G E

(continued)

$ — $ 2,142.8 $3,043.9

CONSOLIDATED STATEMENTS OF CASH FLOWS Year ended December 31,

2014

2013

2012

90.1

$ 13.9

$6.7

(7.7) (218.1) — 104.5 28.2 4.1 (14.5) 2.3 (55.1) 15.8

(2.7) (56.6) — 17.4 2.7 2.2 (1.2) — (42.2) 7.5

0.2 (25.5) (4.3) 4.9 (0.5) 1.2 0.1 — (29.6) 8.1

(28.6) 88.8 (23.1)

10.7 67.7 (1.4)

(7.7) 59.0 (3.1)

111.4

13.3

7.2

98.1

31.3

16.7

(536.8) 95.9 — — (47.7) 24.7 (1,962.2) (11.5) — 8.6 111.8 (167.7) 14.4

(61.7) 46.0 6.6 (1.4) (4.0) 10.1 (168.5) (3.7) 10.0 — 175.4 (357.6) —

(185.0) 16.2 — — — 18.7 (119.0) — (10.0) 34.1 96.8 (251.5) —

(2.7)

—

—

(2,473.2)

(348.8)

(399.7)

647.2 (350.0) (40.0) 215.0 (90.0) 1,283.8 (345.8) (38.7) 190.6 (8.2) — —

— — — 125.0 (125.0) 112.5 (1.7) (2.2) 275.9 (3.8) (1.4) 15.4

160.3 — — 85.8 (85.8) 157.7 — (7.3) 106.2 — (1.6) —

(dollars in millions)

Cash flows from operating activities: Net income Adjustments to reconcile net income to net cash provided by (used in) operating activities: Net (gain) loss from sale of real estate Acquisition related gain Gain on sale of marketable securities Depreciation and amortization Provision for (benefit from) deferred income taxes Amortization of deferred loan costs Amortization of discount and accretion of premium on issuance of the senior notes payable Unrealized net losses on derivatives Income from unconsolidated investments Stock compensation expense Change in assets and liabilities: Accounts receivable Operating distributions from unconsolidated investments Other assets Accrued expenses and other liabilities

$

Net cash provided by operating activities Cash flows from investing activities: Additions to loans Collections of loans Sale of participation interests Capitalized development costs Nonrefundable escrow deposits Net proceeds from sale of real estate Purchases of and additions to real estate Investment in marketable securities Short-term investments Proceeds from sale of marketable securities Investing distributions from unconsolidated investments Contributions to unconsolidated investments Proceeds from settlement of foreign forward contracts Purchases of foreign currency options Net cash used in investing activities Cash flow from financing activities: Borrowings under senior notes payable Repayment of senior notes payable Repayments of junior subordinated debt Borrowings under lines of credit Repayment of lines of credit Borrowings under investment debt Repayment of investment debt Debt issue costs Issuance of common stock Repurchase of common stock Repurchase of warrants Exercise of warrants

(continued)

K E N N E D Y - W I L S O N

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CONSOLIDATED STATEMENTS OF CASH FLOWS

(continued)

Year ended December 31,

2014

(dollars in millions)

1,827.2 (38.9) (51.0) 19.9

Proceeds from the issuance of KWE shares, net Dividends paid Acquisition of noncontrolling interests Contributions from noncontrolling interests Distributions to noncontrolling interests Net cash provided by financing activities Effect of currency exchange rate changes on cash and cash equivalents Net change in cash and cash equivalents Cash and cash equivalents, beginning of year Cash and cash equivalents, end of year

$

2013

2012

— (24.1) — 1.4

— (21.9) (0.5) 0.4

(57.7)

(0.6)

(4.9)

3,163.4

371.4

388.4

(28.8)

3.4

(0.4)

759.5

57.3

5.0

178.2

120.9

115.9

937.7

$178.2

$120.9

See accompanying notes to consolidated financial statements. Year ended December 31, (dollars in millions)

2014

2013

2012

Supplemental disclosure of non-cash investing and financing activities: Unrealized gain (loss) on marketable securities, net of tax Acquisitions of property by assumption of mortgage loan and note payable Sale of condo unit with seller back financing Acquisition of properties in lieu of settlement of notes receivable and interest receivable

$— — — —

$— — — —

$ 3.3 33.8 1.2 36.9

On February 28, 2014, the Kennedy Wilson contributed its 50% interest in an unconsolidated investment which held 14 commercial, retail, and industrial properties portfolio to KWE as part of Kennedy Wilson’s subscription in KWE’s initial public offering. On March 31, 2014 and June 30, 2014, Kennedy Wilson amended the existing operating agreements governing certain of its investments with certain of its equity partners thereby allowing Kennedy Wilson to gain control of these operating properties. As a result of obtaining control, the assets and liabilities of these properties were consolidated in KW Group’s financial statements at fair value in accordance with FASB ASC Topic 805 Business Combinations as described in note 4. During 2014, Kennedy Wilson foreclosed on a 133,000 square foot retail center and an adjacent 2.4 acre vacant lot in Van Nuys, CA and on the notes secured by the Shelbourne Hotel in Dublin, Ireland. Additionally, Kennedy Wilson increased its ownership in a previously unconsolidated investment in a 750-unit Western US multifamily property from 42% to 87% and amended the existing operating agreement to gain control of the property. As a result of such foreclosures, the assets and liabilities of these properties were consolidated in KW Group’s financial statements at fair value under ASC Topic 805 Business Combinations, as described in note 4. During the first quarter of 2013, the Company acquired the interest of some of its existing partners in a 615-unit apartment building in Northern California, increasing its ownership from 15% to 94% and obtaining control of the property. In addition, the Company consolidated three retail centers in the Western U.S. (third quarter of 2013) and the Ritz Carlton, Lake Tahoe (fourth quarter of 2013) which the Company had previously accounted for using the equity method. The Company and its equity partners amended the existing operating agreements governing these investments which allowed the Company to gain control of these operating properties. As a result of obtaining control, the Company was required to consolidate the assets and liabilities of these properties at fair value in accordance with Business Combinations guidance as described in note 4.

K E N N E D Y - W I L S O N

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I N C .

During 2013, the Company sold a 50% interest in an entity that held a note receivable secured by a shopping center and 107 residential units in the United Kingdom to an institutional investor. As a result of the sale and loss of control, $96.0 million in notes receivable and $78.7 million in mortgage loans were deconsolidated as described in note 3. In November 2012, due to a change of control, Kennedy Wilson began to consolidate KW Property Fund II, LP, a limited partnership that had been previously accounted for using the equity method. As a result of obtaining control of this entity, Kennedy Wilson applied Business Combinations guidance and assumed assets and liabilities as described in note 4. Supplemental cash flow information: Year Ended December 31, (dollars in millions)

Cash paid during the year for: Interest(1) Income taxes

2014

2013

2011

$98.9 0.3

$49.7 2.3

$28.7 0.1

(1) Cash paid for interest includes capitalized interest of $0.0 million, $0.8 million, and $2.3 million for the years ended December 31, 2014, 2013, and 2012.

P A G E

6 3

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2014, 2013 and 2012 NOTE 1—ORGANIZATION

management agreement and Kennedy Wilson’s equity ownership interest

Kennedy-Wilson Holdings, Inc. (“KWH”), a Delaware corporation, and its wholly

in KWE, pursuant to the guidance set forth in Financial Accounting Stan-

owned subsidiaries (collectively the “Company” or “Kennedy Wilson”) and

dards Board (“FASB”) Accounting Standards Codification (“ASC”) Subtopic

its consolidated subsidiaries (including KWE as defined below), collectively

810 - Consolidation (“Subtopic 810”), the Company is required to consoli-

“KW Group”, acquires, renovates and holds for attractive yields or resells com-

date KWE’s results in its consolidated financial statements. Additionally, the

mercial and residential real estate, and invests in loan pools and discounted

Company invested $145.2 million of cash and contributed $58.3 million of

loan portfolios.

assets acquired by the Company as part of the IPO. KWE completed a fol-

KW Group also provides various commercial and residential real estate ser-

low-on offering during the fourth quarter where the Company participated

vices including investment management, property management, asset man-

based on its ownership percentage acquiring an additional 4.6 million shares

agement, brokerage, research and marketing in the United States, the United

for $75.0 million. Outside of the IPO and follow-on offering, the Company

Kingdom, Ireland, Spain, Jersey and Japan primarily to public shareholders,

has acquired an additional 3.1 million ordinary shares for $51.1 million and

financial institutions, institutional investors, insurance companies, developers,

owned approximately 14.9% of KWE’s total issued share capital as of De-

builders and government agencies.

cember 31, 2014.

NOTE 2— BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Use of Estimates—The preparation of the accompanying consolidated finan-

Basis of Presentation—The consolidated financial statements include the accounts of KW Group and voting interest entities which it controls. All significant intercompany balances and transactions have been eliminated in consolidation. In addition, Kennedy Wilson evaluates its relationships with other entities to identify whether they are variable interest entities (“VIE”) as defined by Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Subtopic 810 – Consolidation and to assess whether it is the primary beneficiary of such entities. In determining whether Kennedy Wilson is the primary beneficiary of a VIE, qualitative and quantitative factors are considered, including, but not limited to: the amount and characteristics of Kennedy Wilson’s investment; the obligation or likelihood for Kennedy Wilson to provide financial support; Kennedy

cial statements in conformity with U.S. generally accepted accounting principles (“GAAP”) requires management to make estimates and assumptions about future events. These estimates and the underlying assumptions affect the amounts of assets and liabilities reported, disclosure about contingent assets and liabilities, and reported amounts of revenues and expenses. Management evaluates its estimates and assumptions on an ongoing basis using historical experience and other factors, including the current economic environment, which management believes to be reasonable under the circumstances. Management adjusts such estimates and assumptions when facts and circumstances dictate. As future events and their effects cannot be determined with precision, actual results could differ significantly from these estimates. Changes in those estimates will be reflected in the financial statements in future periods.

Wilson’s ability to control or significantly influence key decisions for the

Revenue Recognition—Revenue consists of management and leasing fees

VIE; and the similarity with and significance to the business activities of

(including performance fees), commissions, rental and hotel income, sales of

Kennedy Wilson. Significant judgments related to these determinations in-

real estate and loan income.

clude estimates about the future fair values and performance of real estate

Management fees are primarily comprised of investment management,

held by these VIEs and general market conditions. As of December 31,

property services, and research fees. Investment management fees are

2014, Kennedy Wilson has one VIE that is treated as an unconsolidated

earned from limited partners of funds, co-investments, or separate ac-

investment.

counts and are generally based on a fixed percentage of committed capital

Kennedy Wilson Europe Real Estate Plc (“KWE,” LSE: KWE), a Jersey in-

or net asset value. Property services fees are earned for managing the

vestment company formed to invest in real estate and real estate-related

operations of real estate assets and are generally based on a fixed per-

assets in Europe, closed its initial public offering (“IPO”) on the London Stock

centage of the revenues generated from the respective real estate assets.

Exchange during the quarter ended March 31, 2014, raising approximately

Research fees are earned from consulting arrangements. These fees are

$1.7 billion in gross proceeds. KWE is externally managed by a wholly-owned

recognized as revenue ratably over the period that the respective services

subsidiary of Kennedy Wilson incorporated in Jersey pursuant to an invest-

are performed.

ment management agreement. Due to the terms provided in the investment

P A G E

6 4

Performance fees or carried interest are allocated to the general partner,

Commissions primarily consist of acquisition fees, auction and real estate

special limited partner or asset manager of Kennedy Wilson’s real estate

sales commissions, leasing commissions, and consulting fees. Acquisition fees

funds and loan pool participations based on the cumulative performance

are earned for identifying and closing investments on behalf of investors and

of the fund and loan pools and are subject to preferred return thresholds

are based on a fixed percentage of the acquisition price. Acquisition fees are

of the limited partners and participants. At the end of each reporting peri-

recognized upon the successful completion of an acquisition after all required

od, Kennedy Wilson calculates the performance fee that would be due as if

services have been performed. In the case of auction and real estate sales

the fair value of the underlying investments were realized as of such date,

commissions, the revenue is generally recognized when escrow closes. In ac-

irrespective of whether such amounts have been realized. As the fair value

cordance with the guidelines established for Reporting Revenue Gross as a Prin-

of underlying investments varies between reporting periods, it is necessary

cipal versus Net as an Agent in the ASC Subtopic 605-45, KW Group records

to make adjustments to amounts recorded as performance fees to reflect

commission revenues and expenses on a gross basis. Of the criteria listed in the

either (a) positive performance resulting in an increase in the performance

Subtopic 605-45, Kennedy Wilson is the primary obligor in the transaction, does

fee allocated to the general partner or asset manager or (b) negative perfor-

not have inventory risk, performs all or part of the service, has credit risk, and

mance that would cause the amount due to Kennedy Wilson to be less than

has wide latitude in establishing the price of services rendered and discretion

the amount previously recognized as revenue, resulting in a negative adjust-

in selection of agents and determination of service specifications. Leasing fees

ment to performance fees allocated to the general partner or asset manag-

that are payable upon tenant occupancy, payment of rent or other events beyond

er. Substantially all of the performance fees are recognized in investment

Kennedy Wilson’s control are recognized upon the occurrence of such events.

management fees and substantially all of the carried interest is recognized

Rental income from operating leases is generally recognized on a straight-

in income from unconsolidated investments in our consolidated statements

line basis over the terms of the leases. Hotel income is earned when rooms are

of operations. Total performances fees recognized to date through Decem-

occupied or goods and services have been delivered or rendered.

ber 31, 2014 that may be reversed in future periods if there is negative

Sales of real estate are recognized when title to the real property passes to

fund performance totaled $15.8 million. Performance fees recognized during

the buyer and there is no continuing involvement in the real property. KW Group

the years ended December 31, 2014, 2013, and 2012 were $8.5 million,

follows the requirements for profit recognition as set forth by the Sale of Real

$17.5 million and $8.6 million and the amounts that have not been received

Estate ASC Subtopic 360-20.

are included in accounts receivable—related parties in the accompanying consolidated balance sheet.

Interest income from investments in loans acquired at a discount are recognized using the effective interest method. Interest income from investments

KWE is externally managed by one of the Company’s wholly-owned subsid-

in loans which KW Group originates are recognized at the stated interest rate.

iaries (“KWE Manager”) pursuant to an investment management agreement in

When a loan or loans are acquired with deteriorated credit quality primarily

which capacity Kennedy Wilson will be entitled to receive certain management

for the rewards of collateral ownership, such loans are accounted for as loans

and performance fees. KWE Manager is paid an annual management fee (pay-

until KW Group is in possession of the collateral. However, accrual of income

able quarterly in arrears) equal to 1% of KWE’s adjusted net asset value (EPRA

is not recorded during the conversion period under ASC Subtopic 310-30-25.

NAV). The management fee payable to KWE Manager is paid half in cash and

Income is recognized to the extent that cash is received from the loan.

half in shares of KWE. KW Manager earned $14.0 million in management fees which is eliminated in consolidation due to the Company’s consolidation of KWE. A wholly-owned subsidiary of Kennedy Wilson is also entitled to receive an annual performance fee equal to 20% of the lesser of the excess of the shareholder return for the relevant year (defined as the change in KWE’s adjusted net asset value per ordinary share) over a 10% annual return hurdle, and the excess of year-end adjusted net asset value per ordinary share over a “high water

Real Estate Acquisitions—The purchase price of acquired properties is recorded to land, buildings and building improvements and intangible lease value (value of above-market and below-market leases, acquired in-place lease values, and tenant relationships, if any) based on their respective estimated fair values in accordance with Business Combinations ASC Subtopics 805-10. Acquisition-related costs are expensed as incurred.

mark”. The performance fee is payable in shares of KWE that vest equally over

The valuations of real estate are based on management estimates of the real

a three-year period. No such fee has been earned by Kennedy Wilson as of

estate assets using income and market approaches. The indebtedness se-

December 31, 2014. If earned, these fees would also be eliminated in con-

curing the real estate are valued, in part, based on third party valuations and

solidation.

management estimates also using an income approach.

K E N N E D Y - W I L S O N

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(continued)

December 31, 2014, 2013 and 2012 Noncontrolling Interests—Noncontrolling interests are reported within equity as

Additionally, Kennedy Wilson elected the fair value option for three invest-

a separate component of Kennedy Wilson’s equity in accordance with Noncon-

ments in unconsolidated investment entities. Due to the nature of these in-

trolling Interests in Consolidated Financial Statements ASC Subtopic 810-10.

vestments, Kennedy Wilson elected to record these investments at fair value

Revenues, expenses, gains, losses, net income or loss, and other comprehensive

in order to report the value created in the underlying investments in the results

income are reported in the consolidated statements of operations at the consol-

of our current operations.

idated amounts and net income and comprehensive income attributable to non-

Interest income from investments in loan pool participations are recognized

controlling interests are separately stated. Due to the launch and consolidation

on a level yield basis under the provisions of Loans and Debt Securities Acquired

of KWE and the Company’s 14.9% ownership there has been a large increase in

with Deteriorated Credit Quality ASC Subtopic 310-30, where a level yield model

noncontrolling interest during 2014. Management fees earned by KWE Manger

is utilized to determine a yield rate which, based upon projected future cash

for managing KWE are eliminated in consolidation however the amount attrib-

flows, accretes interest income over the estimated holding period. In the event

utable to the noncontrolling interest holders of KWE are recognized through net

that the present value of those future cash flows is less than net book value,

income (loss) attributable to noncontrolling interest holders.

a loss would be immediately recorded. When the future cash flows of a note

Unconsolidated Investments—KW Group has a number of joint venture interests that were formed to acquire, manage, and/or sell real estate and invest

cannot be reasonably estimated, cash payments are applied to the cost basis of the note until it is fully recovered before any interest income is recognized.

in loan pools and discounted loan portfolios. Investments in unconsolidated

Distributions From Unconsolidated Investments—During the quarter ended

investments are accounted for under the equity method of accounting as KW

March 31, 2013, the Company changed its method of accounting for determin-

Group can exercise significant influence, but does not have the ability to con-

ing the allocation of cash flows received from unconsolidated investments on its

trol the unconsolidated investment. An investment in an unconsolidated invest-

consolidated statement of cash flows from the “cumulative earnings” method to

ment is recorded at its initial investment and is increased or decreased by KW

the “look-through” method, both of which are acceptable methods under GAAP.

Group’s share of income or loss, plus additional contributions and less distri-

Under the “look-through” approach, distributions are reported under operating

butions. A decline in the value of an unconsolidated investment that is other

cash flow unless the facts and circumstances of a specific distribution clearly

than temporary is recognized when evidence indicates that such a decline has

indicate that it is a return of capital (e.g., a liquidating dividend or distribution of

occurred in accordance with Equity Method Investments ASC Subtopic 323-10.

the proceeds from unconsolidated investments’ sale of assets), in which case

As of December 31, 2014, the Company also had an investment in one joint

it is reported as an investing activity. The newly adopted method is preferable

venture which is a VIE in which the Company is not the primary beneficiary and

because it enables KW Group to look to the nature and source of the distribution

therefore accounts for it under the equity method as well.

received and classify it appropriately between operating and investing activities

Profits on the sale of real estate held by unconsolidated investments in

on the statement of cash flows based upon the source, which allows the Com-

which KW Group has continuing involvement are deferred until such time that

pany to present financial statements more consistent with accounting principles

the continuing involvement has been concluded and all the risks and rewards

of consolidation. The effects of the change upon the year ended December 31,

of ownership have passed to the buyer. Profit on sales to unconsolidated in-

2012 is shown in the table below.

vestment in which KW Group retains an equity ownership interest results in

Years Ended December 31,

partial sales treatment in accordance with Sale of Real Estate ASC Subtopic 360-20, thus deferring a portion of the gain as a result of KW Group’s continu-

Cumulative earnings method

ing ownership percentage in the unconsolidated investment. The Company has three investments in joint ventures, KW Property Fund III, L.P. (“KW Fund III”), Kennedy Wilson Real Estate Fund IV, L.P. (“Fund IV”) and Kennedy Wilson Real Estate Fund V, L.P. (“Fund V”) (collectively the “Funds”) that are investment companies under the Investment Companies ASC Subtopic 946-10. Thus, the Funds reflect their investments at fair value, with unrealized gains and losses resulting from changes in fair value reflected in their earnings. Kennedy Wilson has retained the specialized accounting for the Funds pursuant to Retention of Specialized Accounting for Investments in Consolidation ASC Subtopic 810-10 in recording its equity in joint venture income from the Funds.

K E N N E D Y - W I L S O N

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2012

(dollars in millions)

Operating Cash Flows: Operating distributions from joint ventures Net cash provided by operating activities Investing Cash Flows: Investing distributions from joint ventures Net cash used in investing activities

$

30.4 6.8 48.7 (389.7)

Lookthrough method $

40.4 16.7 38.7 (399.7)

Foreign Currencies—The financial statements of subsidiaries located outside

the estimates presented herein are not necessarily indicative of the amounts

the United States are measured using the local currency as the functional cur-

that could be realized upon disposition of the financial instruments. The use of

rency. The assets and liabilities of these subsidiaries are translated at the rates

different market assumptions or estimation methodologies may have a material

of exchange at the balance sheet date, and income and expenses are trans-

impact on the estimated fair value amounts.

lated at the average monthly rate. The foreign currencies include the Euro, the British pound sterling, and the Japanese yen. Cumulative translation adjustments, to the extent not included in cumulative net income, are included in the consolidated statements of equity and comprehensive income as a component of accumulated other comprehensive income. The Company hedges a portion of its investments in foreign subsidiaries with forward and option contracts as discussed below. At December 31, 2014, approximately 45% of our investment account is invested through our foreign platforms in their local currencies. Investment level debt is generally incurred in local currencies. Fluctuations in foreign

Goodwill—Goodwill results from the difference between the purchase price and the fair value of net assets acquired based upon the purchase method of accounting for business combinations. In accordance with Accounting for Goodwill ASC Subtopic 350-20, goodwill is reviewed for impairment on an annual basis. The Company performs its annual review of impairment at year end and when a triggering event occurs between annual year end reviews. As a result of the evaluation performed as described above, Kennedy Wilson has determined that there was no impairment of goodwill as of December 31, 2014, 2013 and 2012.

exchanges rates may have a significant impact on the results of our operations.

Cash and Cash Equivalents—Cash and cash equivalents consist of cash and

In order to manage the effect of these fluctuations, we generally hedge our

all highly liquid investments purchased with maturities of three months or less.

book equity exposure to foreign currencies through currency forward contracts

Cash and cash equivalents are invested in institutions insured by government

and options. We typically hedge 50%-100% of the book equity exposure to

agencies. Certain accounts contain balances in excess of the insured limits.

these foreign currencies.

KW Group’s operations and financial position are affected by fluctuations in

Derivative Instruments And Hedging Activities—KW Group has derivatives to reduce its exposure to foreign currencies. All derivative instruments are rec-

currency exchange rates between the Japanese yen, euro, and British pound sterling against the U.S. Dollar.

ognized as either assets or liabilities in the balance sheet at their respective

Long-Lived Assets—KW Group reviews its long-lived assets (excluding good-

fair values. For derivatives designated in hedging relationships, changes in fair

will) whenever events or changes in circumstances indicate that the carrying

value of cash flow hedges or net investment hedges are recognized in accu-

amount of an asset may not be recoverable in accordance with Impairment of

mulated other comprehensive income, to the extent the derivative is effective

Long-Lived Assets ASC Subtopic 360-10. Recoverability of assets to be held

at offsetting the changes in the item being hedged until the hedged item af-

and used is measured by a comparison of the carrying amount of an asset to

fects earnings. Changes in fair value for fair value hedges are recognized in

estimated undiscounted future cash flows expected to be generated by the

earnings.

asset. If the carrying amount of an asset exceeds its estimated undiscounted

Fair Value Measurements—KW Group accounts for fair value measurements of financial assets and financial liabilities and for fair value measurements of nonfinancial items that are recognized or disclosed at fair value in the financial statements on a recurring basis under the provisions of Fair Value Measurements ASC Subtopic 820-10. Subtopic 820-10 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When es-

future cash flows, an impairment charge is recognized in the amount by which the carrying amount of the asset exceeds the fair value of the asset. Assets to be disposed of are presented separately in the balance sheet and reported at the lower of the carrying amount or fair value less costs to sell, and are no longer depreciated. The assets and liabilities of the assets to be disposed of are classified as held for sale and would be presented separately in the appropriate asset and liability sections of the balance sheet.

timating fair value in the absence of an orderly transaction between market

Accounts Receivable—Accounts receivable are recorded at the contractual

participants, valuations of real estate are based on management estimates of

amount as determined by the underlying agreements and do not bear interest.

the real estate assets using income and market approaches. The indebtedness

An allowance for doubtful accounts is provided when KW Group determines

securing the real estate and the investments in debt securities are valued, in

there are probable credit losses in KW Group’s existing accounts receivable and

part, based on third party valuations and management estimates also using an

is determined based on historical experience. KW Group reviews its accounts

income approach.

receivable for probable credit losses on a quarterly basis. As of December 31,

Fair Value of Financial Instruments—The estimated fair value of financial instruments is determined using available market information and appropriate valuation methodologies. Considerable judgment, however, is necessary to in-

2014, KW Group had an immaterial allowance for doubtful accounts and during the years ended December 31, 2014 and 2013 had recorded no provision for doubtful accounts.

terpret market data and develop the related estimates of fair value. Accordingly,

P A G E

6 7

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(continued)

December 31, 2014, 2013 and 2012 Concentration of Credit Risk—Financial instruments that subject KW Group to

the years in which those temporary differences are expected to be recovered

credit risk consist primarily of accounts and notes receivable, cash equivalents

or settled. The effect on deferred tax assets and liabilities of a change in tax

and derivative instruments. Credit risk is generally diversified due to the large

rates is recognized in income in the period that includes the enactment date.

number of entities composing KW Group’s customer base and their geographic

In accordance with Accounting for Uncertainty in Income Taxes ASC Subtopic

dispersion throughout the United States, the United Kingdom, Ireland, Spain

740-10, Kennedy Wilson recognizes the effect of income tax positions only if

and Japan. Kennedy Wilson performs ongoing credit evaluations of its cus-

those positions are more likely than not of being sustained. Recognized income

tomers and debtors.

tax positions are measured at the largest amount that is greater than 50% likely

Earnings Per Share—Basic earnings per share is computed based upon the weighted average number of shares of common stock outstanding during the periods presented. Diluted earnings per share is computed based upon the weighted average number of shares of common stock and potentially di-

of being realized. Changes in recognition or measurement are reflected in the period in which the change in judgment occurs. Kennedy Wilson records interest related to unrecognized tax benefits in interest expense and penalties in general and administrative expenses.

lutive securities outstanding during the periods presented. The dilutive impact

Recent Accounting Pronouncements—On April 10, 2014, the FASB issued ASU

of potentially dilutive securities including warrants, convertible securities, and

2014-08, which amends the definition of discontinued operations and requires

unvested stock which were outstanding during the period is calculated by the

additional disclosures for disposal transactions that do not meet the revised

“treasury stock” method.

discontinued operations criteria. ASU 2014-08 is required to be adopted for

Comprehensive (Loss) Income—Comprehensive (loss) income consists of net income (loss) and other comprehensive income (loss). In the accompanying consolidated balance sheets, accumulated other comprehensive income consists of foreign currency translation adjustments and unrealized gains (losses) on available for sale securities and derivative instruments.

fiscal years beginning after December 15, 2014, with early adoption permitted. Our early adoption of this pronouncement on January 1, 2014 did not have a material impact on KW Group’s consolidated financial statements. In May 2014, the FASB issued an accounting standard update that will use a five step model to recognize revenue from customer contracts in an effort to increase consistency and comparability throughout global capital markets

Repurchase of Equity Instruments—Upon the decision to retire repurchased

and across industries. The model will identify the contract, identify any sepa-

equity instruments, Kennedy Wilson records the retirement as a reduction to

rate performance obligations in the contract, determine the transaction price,

additional paid in capital.

allocate the transaction price and recognize revenue when the performance

Share-Based Payment Arrangements—Kennedy Wilson accounts for its share-

obligation is satisfied. The new standard will replace most existing revenue

based payment arrangements under the provisions of Share-Based Payments

recognition in GAAP when it becomes effective for the Company on January 1,

ASC Subtopic 718-10. Compensation cost for employee service received in

2017. Management has not yet selected a transition method nor has it deter-

exchange for an award of equity instruments is based on the grant-date fair

mined the effect of the standard on its ongoing financial reporting.

value of the share-based award that is ultimately settled in equity of Kennedy

Reclassifications—Certain balances included in prior years’ financial state-

Wilson. The cost of employee services is recognized over the period during

ments have been reclassified to conform with the current year’s presentation.

which an employee provides service in exchange for the share-based payment award. Share-based payment arrangements with only services conditions that

NOTE 3—LOANS

vest ratably over the requisite service period are recognized on the straight-line

The following table summarizes KW Group’s investment in loans at Decem-

basis and performance awards that vest ratably are recognized on a tranche

ber 31, 2014 and 2013: December 31,

by tranche basis over the performance period. Unrecognized compensation costs for share-based payment arrangements that have been modified are recognized over the original service or performance period. Income Taxes—Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in

P A G E

6 8

2014

2013

Loans Loans — related parties

$313.4 —

$52.7 4.1

Total Loans

$313.4

$56.8

(dollars in millions)

secured by a five-star hotel located in Dublin, Ireland for $152.4 million.

NOTE 4— REAL ESTATE AND ACQUIRED IN PLACE LEASE VALUES

During the third quarter of 2014, Kennedy Wilson converted the loans into

The following table summarizes the Company’s investment in consolidated real

a 100% direct ownership interest in the hotel. See note 4 for further dis-

estate properties at December 31, 2014 and 2013:

During the first quarter of 2014, Kennedy Wilson acquired the loans

December 31,

cussion. Also during the first quarter of 2014, Kennedy Wilson foreclosed on a 133,000 square foot retail center and an adjacent 2.4 acre vacant lot in Van Nuys, CA that had a loan balance of $30.4 million, and converted it into real estate. During the second quarter of 2014, KWE acquired five real estate loans

(dollars in millions)

Land Buildings Building improvements Acquired in place lease values

under receivership which are secured against five properties located across England for $156.3 million. As of December 31, 2014, due to foreign currency

Less accumulated depreciation and amortization

fluctuations, the loans had a balance of $146.1 million. Also during the second

Real estate and acquired in place lease values, net of depreciation and amortization

quarter of 2014, KWE acquired subordinated notes secured by 20 commer-

2014

2013

$1,046.9 2,945.1 75.1

$187.8 484.1 12.7

282.6

29.8

4,349.7 (121.6)

714.4 (26.3)

$4,228.1

$688.1

cial properties located throughout England and Scotland for $62.2 million. The

Real property, including land, buildings, and building improvements, are in-

subordinated notes were paid off in the third quarter. See Note 4 for further

cluded in real estate and are generally stated at cost. Buildings and building

discussion.

improvements are depreciated on the straight-line method over their estimated

During the third quarter of 2014, KWE acquired the loans secured by 13

lives not to exceed 40 years. Acquired in-place lease values are recorded at

properties throughout Ireland for $97.0 million. As of December 31, 2014, due

their estimated fair value and depreciated over their respective weighted-aver-

to foreign currency fluctuations, the loans had a balance of $92.4 million. Also

age lease term which was 7.8 years at December 31, 2014.

during the third quarter of 2014, loans that Kennedy Wilson held on a building in Maui, HI and two related-party funds were paid off. During the fourth quarter of 2014, KWE acquired the loans secured by

Depreciation and amortization expense on buildings, building improvements and acquired in place lease values for the years ended December 31, 2014, 2013 and 2012 was $100.1 million, $13.4 million and $3.3 million, respectively.

an office building in Dublin, Ireland for $53.0 million and Kennedy Wilson acquired a loan secured by a Class A office building in Burbank, CA for

Consolidated Acquisitions—The purchase of property is recorded to land,

$5.0 million.

buildings, building improvements, and intangible lease value (including the value of above-market and below-market leases, acquired in-place lease values,

Interest Income from Notes Receivable—KW Group recognized interest in-

and tenant relationships, if any) based on their respective estimated fair values.

come on loans of $16.8 million, $1.6 million, and $2.8 million during the years

The purchase price generally approximates the fair value of the properties as

ended December 31, 2014, 2013, and 2012.

acquisitions are generally transacted with third-party willing sellers.

K E N N E D Y - W I L S O N

H O L D I N G S ,

I N C .

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(continued)

December 31, 2014, 2013 and 2012 During the year ended December 31, 2014, KW Group acquired the following properties: At Acquisition(1)

(dollars in millions)

KWH Intangible Investment Shareholders’ assets debt Equity

Date acquired

Type

Description

Location

Ownership %(6)

1/20/2014

Commercial(2)

Portfolio of 14 commercial, retail, and industrial properties

United Kingdom

14.9%

$30.0

$63.4

$24.4

$—

$58.9

2/20/2014 2/28/2014

Hotel Multifamily

193 room hotel 24 apartment units, 2 penthouse units, and 1,000 square feet of retail

Western U.S.

72.0%

1.3

8.3

—

—

6.9

Ireland

100.0%

0.6

14.8

0.2

9.6

6.0

3/28/2014

Commercial(3)

26 commercial properties throughout England and Scotland

United Kingdom

14.9%

58.5

155.9

33.4

—

30.2

3/31/2014

Multifamily(4)

281 completed apartments and a partially completed residential block and 725k square feet of commercial space,

Ireland

14.9%

32.9

81.5

1.2

78.9

36.6

4/1/2014

Commercial

98k square foot retail center

Western U.S.

74.3%

2.4

5.8

0.4

6.0

1.9

4/30/2014 6/25/2014 6/26/2014 6/27/2014

Multifamily Multifamily(3) Commercial(3) Commercial(3)(5)

203 unit apartment building 81 unit apartment building 13 commercial properties 21 commercial properties throughout England and Scotland

Western U.S. Ireland Ireland

97.3% 14.9% 14.9 %

2.7 4.8 104.5

24.0 15.0 367.0

0.3 0.3 63.0

13.3 — 273.1

13.3 2.7 34.5

United Kingdom

14.9%

106.4

351.0

77.0

—

70.5

Western U.S.

97.0%

38.3

57.5

0.6

77.2

18.6

Ireland

14.9%

6.8

30.6

—

—

5.0

Western U.S.

100.0%

21.3

106.2

1.3

86.7

42.1

United Kingdom

14.9%

12.2

37.3

—

—

6.6

Western U.S.

100.0 %

2.1

18.6

0.2

13.5

7.4

6/30/2014 7/7/2014

Multifamily Hotel(3)

542 unit apartment building 138 room hotel and golf course

7/29/2014

Multifamily

8/8/2014

Hotel(3)

3 property portfolio with 1,212 units 209 room hotel and two golf courses

8/28/2014 9/5/2014

Multifamily Commercial(3)

10/23/2014

Commercial(3)

11/12/2014 11/20/2014 12/23/2014

Multifamily Multifamily Residential(3)

Land

Building

118 unit apartment building 130k square foot retail center 227k square foot office building 324 unit apartment building 280 unit apartment building

Ireland

14.9%

7.2

34.4

17.0

—

7.8

United Kingdom Western U.S. Western U.S.

14.9% 100.0% 100.0%

85.3 3.2 6.0

232.0 28.6 40.3

12.0 0.5 0.5

— 17.3 37.3

49.1 15.0 9.5

Commercial to multifamily conversion

Spain

14.9%

—

6.4

—

—

1.3

$526.5 $1,678.6

$232.3

$612.9

$423.9

(1) Excludes acquisition expenses and net other assets (2) On February 28, 2014, the Company contributed its 50% interest in this portfolio to KWE as part of the Company’s investment in KWE’s initial public offering. (3) These portfolios of properties were directly acquired and held by KWE. Kennedy Wilson owns approximately 14.9% of the total issued share capital of KWE. (4) This asset was sold to KWE on June 24, 2014. (5) KWE recognized an acquisition-related gain of $15.6 million on the transaction due to its ability to acquire the underlying real estate at a discount to its fair value. See loans converted to real estate section below. (6) Kennedy Wilson ownership interest as of December 31, 2014

K E N N E D Y - W I L S O N

H O L D I N G S ,

I N C .

During the year ended December 31, 2013, KW Group acquired the following properties: (dollars in millions)

Date acquired 04/29/2013 06/27/2013 09/16/2013 10/01/2013 10/01/2013 12/04/2013 12/16/2013

Type Multifamily Commercial Retail Retail Retail Commercial Multifamily

Description 450 unit apartment building 58k square foot office building 113k square foot retail center 125k square foot retail center 193k square foot retail center 3k square foot office building 297 unit apartment building

Location Ownership % Western U.S. 95.4% Western U.S. 100.0% Western U.S. 69.7% Western U.S. 75.2% Western U.S. 75.1% Ireland 100.0% Western U.S. 100.0%

Land $18.4 11.2 1.3 2.7 3.5 0.7 3.8 $41.6

Building $ 43.0 18.5 4.2 6.7 7.4 0.5 25.8 $106.1

Intangible assets $0.3 — 0.3 1.5 0.7 — 0.2 $3.0

Investment Debt $ 49.7 18.7 4.0 7.3 8.0 — 22.4 $110.1

KWH Shareholders’ Equity $12.1 11.0 1.8 3.6 3.5 1.2 7.4 $40.6

Consolidation of previously unconsolidated investments—During the year

which governs 50 multifamily properties in and around Tokyo, Japan com-

ended December 31, 2014 and 2013, the Company amended the existing op-

prising approximately 2,400 units. Kennedy Wilson has an approximate 41%

erating agreements governing certain of its investments with its equity partners

ownership interest in these investments.

thereby allowing the Company to gain control of these operating properties. As

In December 2014, Kennedy Wilson increased its ownership in a previous-

a result of gaining control, the assets and liabilities of these properties were

ly unconsolidated investment in a 750-unit Western U.S. multifamily property

consolidated in KW Group’s financial statements at fair value in accordance with

from 42% to 87% and amended the existing operating agreement to gain

FASB ASC Topic 805 Business Combinations. As the fair value of the property

control of the property

was in excess of the carrying value of its ownership interest, an acquisition-

These joint ventures were previously accounted for on an equity method

related gain was recorded in the accompanying consolidated statement of op-

basis due to substantive participation of the equity partners in the operational

erations for the years ended December 31, 2014 and 2013. See Note 6 - Fair

control over the real estate assets. The operating agreements of the invest-

Value Measurements for further detail of the methodology used to determine the

ments were amended and restated to give Kennedy Wilson full operational con-

fair value of the assets and liabilities acquired in these transactions.

trol over the real estate assets while the equity partners retained only certain

On March 31, 2014, Kennedy Wilson and one of its equity partners amend-

protective rights. Given that Kennedy Wilson now controls the joint ventures

ed and restated existing operating agreements governing six separate joint

and the ultimate real estate assets held by the joint ventures under the amend-

ventures that hold real estate-related investments located in the U.K. and Ire-

ed and restated operating agreements, a change to the accounting treatment

land. Kennedy Wilson has an approximate 50% ownership interest in these

of these joint ventures from the equity method to consolidated treatment pur-

investments.

suant to ASC 810 Consolidation was required.

On June 30, 2014, Kennedy Wilson and one of its equity partners amended and restated the existing operating agreement of KW Residential (“KWR”)

P A G E

7 1

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(continued)

December 31, 2014, 2013 and 2012 The following table summarizes the assets and liabilities assumed as a result of gaining control of these properties and the acquisition-related gains recognized:

(dollars in millions)

Property

Type

Three multifamily properties Two office properties Two commercial properties and loans secured by real estate 50 multifamily properties Multifamily property

Multifamily Commercial

Location

Cash

Ireland Ireland

$ 3.6 4.3

Commercial & U.K. Loans Multifamily Japan Multifamily Western US

Real estate and acquired in-place lease values $ 248.5 223.9

Accounts Accounts payable, receivable and accrued expenses, other assets and other liabilities $ 0.9 7.6

$ 5.4 4.9

Investment debt

Noncontrolling interests

$114.3 75.2

$ 66.6 77.9

Acquisition related gain(1) $ 39.3 33.5

9.6

195.0

5.6

8.1

100.8

62.0

11.3

21.0 0.9 $39.4

501.2 101.3 $1,269.9

14.3 0.3 $28.7

4.6 0.9 $23.9

283.7 63.2 $637.2

146.8 3.7 $357.0

66.7 19.5 $170.3

(1) $65.2 million was allocated to noncontrolling interest for the portion the acquisition related gain that relates to our equity partners ownership in the properties.

During the first quarter of 2013, the Company acquired the interest of some

In addition, by amending the existing operating agreements governing

of its existing partners in a 615-unit apartment building in Northern California,

three retail centers in the Western U.S. (third quarter of 2013) and the

increasing its ownership from 15% to 94%. The original 15% interest had

Ritz Carlton, Lake Tahoe (fourth quarter of 2013) which the Company had

a book value of $0 due to prior distributions. Cash consideration of $15.7

previously accounted for using the equity method, the Company gained

million was paid by the Company to increase its ownership in the property to

control of these properties and consolidated the properties at fair value.

94% and resulted in the Company obtaining control. The Company recorded

The following table summarizes the assets and liabilities assumed as a

an acquisition-related gain as the fair value was in excess of the carrying value

result gaining control of these properties and the acquisition related gains

of its ownership interest. As this transaction was between willing third party

recognized.

participants, the purchase price was an approximation of fair value.

(dollars in millions)

Property

Type

615-unit apartment building Three retail centers Ritz-Carlton

Multifamily Retail Residential

Cash Real Estate, net $1.3 1.4 4.4 $7.1

Accounts Receivable and other assets

$120.1 20.4 105.1 $245.6

Accounts payable and accrued expenses Investment Debt

$ 2.3 9.2 7.4 $18.9

$ 3.2 0.7 8.0 $11.9

$ 93.5 20.1 28.0 $141.6

Noncontrolling interests

Acquisition related gain

$ 1.8 0.5 18.0 $20.3

$ 9.5 2.0 45.1 $56.6

Loans converted to real estate—During the quarter ended March 31, 2014,

KWE acquired subordinated notes on a portfolio of commercial properties in

Kennedy Wilson foreclosed on a 133,000 square foot retail center and an adja-

the United Kingdom during the second quarter of 2014 and used its position

cent 2.4 acre vacant lot in Van Nuys, CA. During the quarter ended September

as a debt holder to secure the transaction. KWE recognized an acquisition-re-

30, 2014, Kennedy Wilson foreclosed on the notes secured by the Shelbourne

lated gain of $15.6 million (the Company’s share was $2.1 million) on the

Hotel in Dublin, Ireland.

transaction due to its ability to acquire the underlying real estate at a discount

As a result of the foreclosures and taking title to the properties, the assets

to its fair value.

and liabilities of the retail center and hotel were consolidated in KW Group’s financial statements at fair value under ASC Topic 805 - Business Combinations and the vacant lot was consolidated in KW Group’s financial statements at fair market value. As the fair value of the assets was in excess of the basis in the previously held mortgage notes, Kennedy Wilson recognized a $3.7 million acquisition-related gain on the retail center and vacant land and a $28.6 million acquisition-related gain on the hotel.

P A G E

7 2

Pro forma results of operations—The results of operations of the assets acquired have been included in our consolidated financial statements since the date of the acquisitions. The Company’s unaudited pro forma results have been prepared for comparative purposes only and do not purport to be indicative of the results of operations that would have occurred had these acquisition been consummated at the beginning of the periods presented.

The unaudited pro forma data presented below assumes that the acquisitions

loan originations. KW Group has significant influence over these entities, but

during the year ended December 31, 2014 occurred as of January 1, 2013.

not control, and accordingly, these investments are accounted for under the equity method.

Unaudited

Year Ended December 31,

Pro forma net income (loss) attributable to Kennedy-Wilson Holdings, Inc. common shareholders(1) Pro forma net loss per share: Basic Diluted

in joint ventures by investment type and geographic location as of Decem-

2014

2013

ber 31, 2014:

$538.0 50.0

$363.6 14.9

(dollars in millions)

(dollars in millions, except for per share data)

Pro forma revenues Pro forma income from unconsolidated subsidiaries

Joint Venture Holdings—The following table details KW Group’s investments

62.0

(9.6)

$ 0.69 $ 0.67

$ (0.13) $ (0.13)

Multifamily Commercial

Western U.S. United Kingdom

$134.5 —

Spain

—

Total

(1) Excludes the effects of acquisition-related gains.

$ 134.5

Residential Loan and Hotel

$110.3 $50.3 31.5 — —

$71.0 —

—

—

$ 141.8 $ 50.3

$ 71.0

Other

Total

$ 9.3 $375.4 — 31.5 28.9

28.9

$38.2 $ 435.8

The following table details our investments in joint ventures by investment type and geographic location as of December 31, 2013:

NOTE 5—UNCONSOLIDATED INVESTMENTS

Residential and Hotel

KW Group has unconsolidated investments through real estate related joint

(dollars in millions)

ventures and loan pool participations. The following table details its invest-

Western U.S. Japan United Kingdom Ireland Spain

$133.3 68.8 — 48.2 —

$160.3 $50.3 — — 104.5 6.3 96.1 — — —

$48.7 $ 8.0 $400.6 — — 68.8 — — 110.8 — — 144.3 — 26.9 26.9

Total

$250.3

$360.9 $56.6

$48.7 $34.9 $751.4

ments in joint ventures and loan pool participations as of December 31, 2014 and December 31, 2013: December 31,

December 31,

2014

2013

$ 435.8

$ 751.4

(dollars in millions)

Investments in joint ventures Investments in loan pool participations Total

Multifamily Commercial

Loan

Other

Total

56.4

34.7

Loan Pool Participations—As of December 31, 2014 and 2013, the Com-

$492.2

$786.1

pany’s investment in loan pool participations totaled $56.4 million and $34.7 million, respectively.

KW Group has a number of joint venture interests, generally ranging from

The following table represents the demographics of the Company’s investment

5% to approximately 50% ownership, that were formed to acquire, manage,

in the loan pools including the initial UPB and the UPB as of December 31, 2014.

develop, and/or sell real estate and invest in discounted loan purchases and

Unpaid Principal Balance

(dollars in millions)

Location

KW Group Ownership

Initial(1)

February 2010(3) April 2012 August 2012 December 2012 April 2013 August 2013

Western U.S. Western U.S. Ireland United Kingdom United Kingdom United Kingdom

15.0% 75.0% 10.0% 10.0% 10.0% 20.0%

$ 342.4 43.4 438.9 603.8 180.9 132.7

May 2014(4)

United Kingdom

33.3%

Acquisition Date

December 31, 2014(1) $

KW Group initial equity invested

Investment balance at December 31, 2014

Expected accretion over total estimated collection period(1)

Accreted to date(2)

— 2.8 48.1 101.6 101.2 132.7

$ 11.1 30.9 7.0 19.3 13.0 7.5

$ 0.5 2.4 8.4 3.0 6.0 8.3

$ 4.6 4.3 2.1 2.5 4.9 4.5

$ 4.6 4.1 1.6 2.5 2.2 2.0

101.2

100.6

30.3

27.8

2.6

1.1

$1,843.3

$487.0

$119.1

$56.4

$25.5

$18.1

(1) Estimated foreign exchange rate is £0.64 = $1 USD and €0.82 = $1 USD as of December 31, 2014. (2) Amounts accreted to date are translated at monthly average exchange rates over the life of the loan pool. (3) Equity invested represents guarantee claims against note holders in loan pool. (4) This loan portfolio was directly acquired and held by KWE. Kennedy Wilson owns approximately 14.9% of the total issued share capital of KWE as of December 31, 2014.

K E N N E D Y - W I L S O N

H O L D I N G S ,

I N C .

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(continued)

December 31, 2014, 2013 and 2012 Investment Update - UK Loan Pool—In 2011, the Company, along with in-

The increase in equity in joint venture income during 2013 compared to

stitutional partners, acquired a loan portfolio consisting of 58 performing loans

2012 is primarily due to acquisition-related gains of $36.2 million on note

(the “U.K. Loan Pool”). The Company, through a 50/50 joint venture with one

conversions in European joint venture investments. See Note Conversion into

of its partners, acquired a 25% participation interest in the pool for $440.9

Real Estate section below for a more detailed discussion. These gains were

million, of which $323.4 million was funded with debt that was fully repaid

offset by acquisition-related expenses of $13.5 million relating to new joint

during 2013. As a result of the positive performance of the loan pool, all of the

ventures in the United Kingdom, Ireland and Spain which resulted in significant

Company’s initial equity contribution has been returned as of December 31,

stamp duty taxes.

2014. During the year ended December 31, 2013, the Company received

The following table presents the interest income and foreign currency gain

$66.2 million in distributions related to resolutions in the UK Loan Pool and

and (loss) recognized by Kennedy Wilson during the years ended December 31,

$23.2 million from its additional asset management fee arrangement. As a

2014, 2013 and 2012 in each of the loan pools that were outstanding:

result of the substantial liquidation of the loan pool in 2013, Kennedy Wilson has recognized a $2.8 million loss in foreign currency translations in the accompanying consolidated statements of operations. Income from Unconsolidated Investments—For the year ended Decem-

Year Ended December 31, (dollars in millions)

2014

2013

2012

Interest income recognized

$ 9.5

$11.9

$6.4

(4.7)

(2.2)

3.0

$ 4.8

$ 9.7

$9.4

Foreign currency translation (loss) gain

ber 31, 2014, 2013, and 2012 equity in joint venture income was $44.7 million, $29.8 million, and $21.5 million. The increase in equity in joint venture income during 2014 compared to 2013 relates to the sale of the Company’s 25% interest in a portfolio of commercial investments in Dublin, Ireland to KWE that resulted in a gain of $26.6 million on the Company’s investment. This transaction was unanimously approved by the independent shareholders of KWE. There were no new European joint venture investments during 2014 so acquisition-related expenses were minimal compared to the prior period.

Note Conversion into Real Estate within Unconsolidated Investments— During 2013, the Company and its equity partners converted three mortgage notes into real estate owned. As a result of the conversion, the joint ventures were required to consolidate the assets and liabilities at fair value under ASC 805 - Business Combinations. As the fair value of each of the assets was in excess of the basis of the previously held mortgage note, the Company recorded the following acquisition related gains:

Location

Total Joint Venture Acquisition Related Gain

The Company’s Portion of Total Gain

Dublin, Ireland Manchester, UK

$30.1 32.3

$15.0 16.2

(Amounts shown in millions)

Date

Description

Q2 2013 Q3 2013

Class A Office building and Adjacent 3.5 acre site The Rock—a retail, residential, and entertainment center

Q4 2013

Class A Office Building

Glasgow, Scotland

Total

10.1

5.0

$72.5

$36.2

method and is now consolidated. On September 30, 2013, the Compa-

There was no comparable activity during 2014.

ny and one of its equity partners amended existing operating agreements Changes in Control—On June 30, 2014, Kennedy Wilson and one of its equity partners amended existing operating agreements governing KWR which was previously accounted for using the equity method and is now consolidated. On March 31, 2014, Kennedy Wilson and one of its equity partners amended existing operating agreements governing investments for six investments in

governing investments in three retail centers in the Western United States which were accounted for on the equity method and is now consolidated. See Note 4 for more discussion on the impact of consolidation. All of the above investments were accounted for and are presented as unconsolidated investments in the prior periods.

Europe which were accounted for using the equity method and are now conContributions to Unconsolidated Investments—During the years ended

solidated. On December 12, 2013, the Company and one of its equity partners

December 31, 2014, 2013, and 2012, Kennedy Wilson made $142.6 million,

amended the existing operating agreement governing its investments in

$322.7 million, and $178.6 million, respectively, in contributions to new and

the Ritz Carlton Hotel, Lake Tahoe which was accounted for on the equity

existing joint venture investments.

K E N N E D Y - W I L S O N

H O L D I N G S ,

I N C .

See the table below for a breakdown of contributions to new joint venture investments for the years ended December 31, 2014, 2013 and 2012: Years Ended December 31,

2014

(dollars in millions)

2012

Region

No. of Properties

Initial Contribution

No. of Properties

Initial Contribution

No. of Properties

Initial Contribution

Western U.S. United Kingdom Ireland Western U.S. Ireland Western U.S. Spain

— 14 — 2 — 3 —

$ — 57.2 — 4.7 — 18.3 —

4 42 14 2 1 3 1

$ 30.3 92.2 38.7 9.1 58.0 10.0 27.2

9 — 2 5 2 2 —

$ 26.9 — 45.8 22.9 34.3 19.6 —

19

$80.2

67

$265.5

20

$149.5

Investment Type Commercial Commercial Commercial Multifamily Multifamily Residential Other

2013

Total

In addition to the capital contributions above to new joint venture investments, the Company contributed $62.4 million, $57.2 million and $29.1 million to existing joint ventures to pay off external debt, fund our share of a development project and for working capital needs, during the years ended December 31, 2014, 2013, and 2012, respectively. Distributions from Joint Ventures and Loan Pool Participations—The following table details cash distributions by investment type and geographic location for the year ended December 31, 2014:

Multifamily

Commercial

Loan

Residential, Hotel and Other

Total

(dollars in millions)

Operating

Investing

Operating

Investing

Operating

Investing

Operating

Investing

Operating

Investing

Western U.S. Japan United Kingdom Ireland Other

$ 9.4 1.7 — — —

$3.2 — — — —

$21.1 — 6.9 31.2 —

$45.9 — 18.4 30.3

$0.3 — 7.4 — —

$2.5 — 5.4 — —

$10.8 — — — —

$5.1 — — — 1.0

$41.6 1.7 14.3 31.2 —

$ 56.7 — 23.8 30.3 1.0

Total

$11.1

$3.2

$59.2

$94.6

$7.7

$7.9

$10.8

$6.1

$88.8

$111.8

Investing distributions resulted from the sale of the commercial portfolio in

factors cited under ASC 810-20 “Control of Partnerships and Similar Entities”

Dublin, Ireland above as well as commercial properties in the Western United

which presumes that control is held by the general partner (and managing

States and United Kingdom and homes in residential development projects in

member equivalents in limited liability companies). Limited partners’ substan-

the Western United States, the refinancing of property level debt and loan reso-

tive participation rights may overcome this presumption of control. The Com-

lutions. Operating distributions resulted from operating cash flow generated by

pany accounts for joint ventures it is deemed not to control using the equity

the joint venture and loan pool participant investments.

method of accounting while controlled entities are consolidated.

Variable Interest Entities—We determine the appropriate accounting method

Capital Commitments—As of December 31, 2014, the Company has unful-

with respect to all investments that are not VIEs based on the control-based

filled capital commitments totaling $33.1 million to five of its joint ventures. The

framework (controlled entities are consolidated) provided by the consolidations

Company may be called upon to contribute additional capital to joint ventures in

guidance in ASC Topic 810. The Company’s determination considers specific

satisfaction of the Company’s capital commitment obligations.

P A G E

7 5

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(continued)

December 31, 2014, 2013 and 2012 Guarantees—The Company has certain guarantees associated with loans se-

the principal amount of the loan and the net sale proceeds from the property.

cured by consolidated assets or assets held directly or in various joint ventures.

Based upon the Company’s evaluation of guarantees under ASC Subtopic 460-

As of December 31, 2014 the maximum potential amount of future payments

10 “Estimated Fair Value of Guarantees,” the estimated fair value of guarantees

(undiscounted) the Company could be required to make under the guarantees

made as of December 31, 2014 and 2013 is immaterial.

was approximately $54.9 million which is approximately 1% of the property level debt of KW Group and its unconsolidated investments. The guarantees expire through 2021, and the Company’s performance under the guarantees

Summarized financial data—Summarized financial data of the joint ventures is as follows:

would be required to the extent there is a shortfall upon liquidation between

December 31, 2014

(dollars in millions)

Balance sheets for equity method investments: Assets Cash and restricted cash Real estate Loan pool participation(2) Other Total assets

(3)

Liabilities Debt Other Total liabilities

Greater than 20%(1)

Other

$ 43.7 770.9 —

$ 33.0 2,390.2 —

56.9

49.3

106.2

$871.5

$2,472.5

$376.8 44.8

Total(3)

December 31, 2013

Greater than 20%(1)

Other

Total(3)

40.9 2,438.8 —

$ 114.9 4,435.6 4.0

466.8

150.7

617.5

$3,344.0

$2,541.6

$2,630.4

$5,172.0

$1,523.2

$1,900.0

$1,263.6

$1,714.1

$2,977.7

48.3

93.1

75.5

64.7

140.2

421.6

1,571.5

1,993.1

1,339.1

1,778.8

3,117.9

$

76.7 3,161.1 —

$

74.0 1,996.8 4.0

$

Partners’ capital Kennedy Wilson - investments in joint ventures Other partners Total partners’ capital-investments in joint ventures

84.8

281.0

365.8

379.5

344.7

724.2

365.1

620.0

985.1

818.6

506.9

1,325.5

449.9

901.0

1,350.9

1,198.1

851.6

2,049.7

Kennedy Wilson - investments in loan pool participation(2)

—

—

—

2.2

—

2.2

Other partners

—

—

—

2.2

—

2.2

—

—

—

4.4

—

4.4

$871.5

$2,472.5

$3,344.0

$2,541.6

$2,630.4

$5,172.0

Total partners’ capital - investments in loan pool participation Total liabilities and partners’ capital

P A G E

7 6

Total investments in joint ventures are comprised of the following: December 31, 2014

(dollars in millions)

December 31, 2013

Greater than 20%(1)

Other

Total(3)

Greater than 20%(1)

$84.8

$281.0

$365.8

$379.5

$344.7

$724.2

—

60.7

60.7

—

19.6

19.6

84.8

341.7

426.5

379.5

364.3

743.8

—

9.3

9.3

—

7.6

7.6

$84.8

$351.0

$435.8

$379.5

$371.9

$751.4

$ —

$

$

$

$

$

Equity method Fair value election investments

Cost method Total Investments in joint ventures Loan pool participation(2)

—

—

—

Total(3)

Other

—

—

(1) Equity in income from the joint venture or income from loan pool participation for the year ended December 31, 2013 or 2012 exceeded 20% of Kennedy Wilson’s income from continuing operations before income taxes for the year ended December 31, 2013 or 2012. No individual investments in joint ventures or loan pool participation exceeded the income test for December 31, 2014 and amounts in current period greater than 20% are included as they exceed income threshold for the year ended December 31, 2013 or 2012. No individual investments in joint ventures or loan pool participation exceeds 20% of the total assets of Kennedy Wilson as of December 31, 2014 or 2013. (2) This loan pool has been included in the investment in joint ventures footnote greater than 20% column as this entity was determined to be a significant investment for purposes of S-X §210.3-09. The other investments in loan pool participation were excluded as they were determined to be not significant investments. (3) The balance sheets and income statements include all investments in joint ventures as well as an investment in a loan pool participation, which was determined to be significant investments for the purposes of S-X §210.3-09.

Equity in joint venture income for the years ended December 31: 2014

2013

2012

Net income allocation Unrealized (loss) gain on fair value option

$46.5 (1.8)

$28.8 1.0

$13.7 7.8

Total equity in joint venture income

$44.7

$29.8

$21.5

$ 2.1

$ 8.7

$ 7.9

(dollars in millions)

Participation income allocation

Year Ended December 31, 2014

(dollars in millions)

Greater than 20%(1)

Year Ended December 31, 2013

Other

Total(3)

Greater than 20%(1)

$385.1

$539.5

$924.6

$229.6

$427.5

$657.1

52.1 22.2

60.2 79.8

112.3 102.0

58.1 42.3

57.9 86.8

116.0 129.1

254.9

380.8

635.7

83.6

271.7

355.3

329.2

520.8

850.0

184.0

416.4

600.4

$ 55.9

$ 18.7

$ 74.6

$ 45.6

$ 11.1

$ 56.7

$

$ 41.5 — (22.8)

$ 46.5 2.1 11.3

$ 28.6 8.7 (4.3)

$

$ 28.8 8.7 6.6

Other

Total(3)

Statements of income: Revenues Depreciation Interest Other expenses Total expenses Net income

(3)

Net income allocation: Kennedy Wilson - investments in joint ventures Kennedy Wilson - investments in loan pool participation(2) Other partners Other partners - investments in loan pool participation(2) Net income(3)

5.0 2.1 34.1

0.2 — 10.9

14.7

—

14.7

12.6

—

12.6

$ 55.9

$ 18.7

$ 74.6

$ 45.6

$ 11.1

$ 56.7

K E N N E D Y - W I L S O N

H O L D I N G S ,

I N C .

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(continued)

December 31, 2014, 2013 and 2012 Year Ended December 31, 2012 (dollars in millions)

Greater than 20%(1)

Other

Total(3)

$38.2

$532.5

$570.7

(4.1) 22.0

72.6 87.9

68.5 109.9 336.9

Statements of income: Revenues Depreciation Interest Other expenses

(0.7)

337.6

Total expenses

17.2

498.1

515.3

Net income

$21.0

$ 34.4

$ 55.4

Net income allocation: Kennedy Wilson - investments in joint ventures Kennedy Wilson - investments in loan pool participation(2) Other partners - investments in joint ventures

$(3.3) 7.9 16.2

$ 17.0 — 17.4

$ 13.7 7.9 33.6

0.2

—

0.2

$21.0

$ 34.4

$ 55.4

Other partners - investments in loan pool participation Net income (1) See discussion above. (2) See discussion above. (3) See discussion above.

NOTE 6—FAIR VALUE MEASUREMENTS AND THE FAIR VALUE OPTION Fair Value Measurements—Fair Value Measurements and Disclosures ASC Subtopic 820-10 establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to measurements

The following table presents fair value measurements (including items that are required to be measured at fair value and items for which the fair value option has been elected) as of December 31, 2014: (dollars in millions) (1)

Marketable securities Unconsolidated investments Currency forward contract(2)

Level 1

Level 2

Level 3

$6.5 — —

$ — — 23.9

$ — 85.9 —

—

6.7

—

6.7

$6.5

$30.6

$85.9

$123.0

Currency option contract

involving significant unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy are as follows: Level 1—Valuations based on unadjusted quoted market prices in active markets for identical securities.

Total $

6.5 85.9 23.9

(1) Included in other assets. (2) See further discussion of currency forward contracts.

Level 2—Valuations based on observable inputs (other than Level 1 prices),

The following table presents fair value measurements (including items that

such as quoted prices for similar assets and quoted prices in markets that are

are required to be measured at fair value and items for which the fair value

not active.

option has been elected) as of December 31, 2013:

Level 3—Valuations based on inputs that are unobservable and significant to the overall fair value measurement, and involve management judgment. The level in the fair value hierarchy within which a fair value measurement in its entirety falls is based on the lowest level input that is significant to the fair value measurement in its entirety.

K E N N E D Y - W I L S O N

H O L D I N G S ,

I N C .

(dollars in millions)

Marketable securities Unconsolidated investments Currency forward contract

Level 1 $4.0 — — $4.0

Level 2 $ — — (9.6) $(9.6)

Level 3 $ — 81.1 — $81.1

Total $ 4.0 $81.1 (9.6) $75.5

Marketable Securities—Marketable securities include Kennedy Wilson’s in-

(dollars in millions)

vestment in publicly traded equity securities. The carrying value of marketable

Beginning balance Unrealized and realized gains Unrealized and realized losses Contributions Distributions

securities is a level 1 valuation as the fair value is based off of unadjusted quoted market prices in active markets for identical securities. The amount above excludes Kennedy Wilson’s 20.2 million shares in KWE as the investment is eliminated due to the consolidation of KWE’s results in KW Group’s financial

2014

2013

2012

$ 81.1 1.8 (2.5) 20.0 (10.5)

$ 68.4

$ 51.4 10.0 (0.4) 11.6 (4.2)

(4.0)

5.3 (0.3) 10.8 (3.1) —

$ 85.9

$ 81.1

Other

statements. Based on the December 31, 2014 share price, Kennedy Wilson’s investment in KWE had a market value of approximately $330.8 million (cost

Ending Balance

— $ 68.4

basis of $333.8 million). As of December 31, 2014, the Company had a net

The change in unrealized and realized gains and losses are included in

investment of approximately £203.1 million in KWE, and has hedged 46%

income from unconsolidated investments in the accompanying consolidated

of this investment through using currency forward contracts with a notional

statements of operations. The change in unrealized gains (losses) on level 3 investments during 2014

amount of £92.5 million.

and 2013 for investments still held as of December 31, 2014 and 2013 were Unconsolidated Investments—Kennedy Wilson records its investments in KW Property Fund III, L.P., Kennedy Wilson Real Estate Fund IV, and Fund V (the “Funds”) based upon the net assets that would be allocated to its interests in the Funds assuming the Funds were to liquidate their investments at fair value as of the reporting date. The Company’s investment balance in the Funds was $24.9 million and $33.5 million at December 31, 2014 and 2013, respectively, which is included in unconsolidated investments in the accompanying consol-

a loss of $2.0 million and a gain of $4.0 million, respectively. In estimating fair value of real estate held by the Funds, three unconsolidated investments that elected the fair value option investments and the value of the real estate consolidated (as further described in Note 4), the Company considers significant inputs such as capitalization and discount rates. The table below describes the range of inputs used as of December 31, 2014 for real estate assets:

idated balance sheets. As of December 31, 2014, the Company had unfunded capital commitments to the Funds in the amount of $29.0 million. Kennedy Wilson elected to use the fair value option (“FV Option”) for three unconsolidated investments to more accurately reflect the timing of the value created in the underlying investments and report those results in current operations. Kennedy Wilson’s investment balance in the FV Option investments was $61.0 million and $47.6 million at December 31, 2014 and 2013, respectively, which are included in unconsolidated investments in the accompanying balance sheets. Option investments, we consider significant unobservable inputs such as capitalization and discount rates. fair value by type:

7.00% — 11.00% 8.00% — 9.00% 7.50% 4.90% — 9.50% 12.00% — 25.50% 8.00% — 9.00%

siders significant inputs such as the term of the debt, value of collateral, market loan-to-value ratios, market interest rates and spreads, and credit quality of of investments range from 0.50% to 4.94%. The accuracy of estimating fair value for investments utilizing unobservable

December 31, 2014

December 31, 2013

$ 24.9

$ 33.5

61.0

47.6

$ 85.9

$ 81.1

FV Option Total

5.25% — 8.25% 6.70% — 7.00% 6.50% 4.40% — 6.50% n/a n/a

investment entities. The credit spreads used by Kennedy Wilson for these types

The following table summarizes our investments in joint ventures held at

Funds

Estimated rates used for Discount Rates

In valuing real estate related assets and indebtedness, Kennedy Wilson con-

In estimating fair value of real estate held by the Funds and the three FV

(dollars in millions)

Office Retail Hotel Multifamily Loan Land and condominium units

Capitalization rates

inputs cannot be determined with precision, cannot be substantiated by comparison to quoted prices in active markets, and may not be realized in a current

The following table presents changes in Level 3 investments, investments in investment companies and investments in joint ventures that elected the fair

sale or immediate settlement of the asset or liability. Additionally, there are inherent uncertainties in any fair value measurement technique, and changes in the underlying assumptions used, including cap rates, discount rates, liquidity risks, and estimates of future cash flows, could significantly affect the fair value measurement amounts.

value option, for the years ended December 31:

P A G E

7 9

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(continued)

December 31, 2014, 2013 and 2012 Currency forward and option contracts—KW Group has currency for-

adjustments associated with the derivative utilize Level 3 inputs. However, as

ward and option contracts to manage their exposure to currency fluctuations

of December 31, 2014, KW Group assessed the significance of the impact of

between its functional currency (U.S. dollars) and the functional currency (eu-

the counterparty valuation adjustments on the overall valuation of its derivative

ros, GBP, and JPY) of certain of our subsidiaries. To accomplish this objective,

positions and determined that the counterparty valuation adjustments are not

KW Group hedged these exposures by entering into currency forward and op-

significant to the overall valuation of its derivative. As a result, we have deter-

tion contracts to partially hedge KW Group’s exposure to its net investment

mined that our derivative valuation in its entirety be classified in Level 2 of the

in certain foreign operations caused by currency fluctuations. The currency

fair value hierarchy.

forward contracts are valued based on the difference between the contract

Changes in fair value are recorded in other comprehensive income in the

rate and the forward rate at maturity of the foreign currency applied to the

accompanying consolidated statements of comprehensive income (loss) as the

notional value in that foreign currency discounted at a market rate for similar

portion of the currency forward and option contracts used to hedge currency

risks. The Company’s currency options are valued using a variant of the Black-

exposure of its certain consolidated subsidiaries qualifies as a net investment

Sholes model tailored for currency derivatives and the forward foreign currency

hedge under FASB ASC Topic 815. The fair value of the derivative instruments

contracts are valued based on the difference between the contract rate and

held as of December 31, 2014 are reported in other assets for hedge assets

the forward rate at maturity of the yen applied to the notional value in yen

and included in accrued expenses and other liabilities for hedge liabilities on

discounted at a market rate for similar risks. The Company has determined

the balance sheet. See Note 12 for a complete discussion on other compre-

that, based on an evaluation of the significance of each of the inputs used

hensive income including currency forward and option contracts and foreign

to value these instruments, they are considered to be level 2 in their entirety.

currency translations.

Although we have determined that the majority of the inputs used to value its derivative fall within Level 2 of the fair value hierarchy, the counterparty risk

The table below details the currency forward contracts and currency option contracts KW Group had as of December 31, 2014:

(Amounts in millions, other than forward rate/strike price)

Type

Underlying Currency

EUR

Forward

USD

€

GBP

Forward

USD

EUR(1)

Forward

YEN(2)(3)

Option

Currency Hedged

Total

Fair Value Assets

Change in Unrealized Gains (Losses)

December 31,

Year Ended December 31,

2014

2014

Trade Date

Settlement/ Expiration Date

Forward Rate/ Strike Price

93.5

5/31/2012 6/25/2014

6/4/2015 6/27/2019

1.2400 - 1.4471

$ 8.7

$14.1

£

118.0

2/13/2014 10/9/2014

8/13/2015 10/15/2019

1.5943 - 1.6491

5.8

5.8

GBP

€

196.0

6/18/2014 11/10/2014

8/27/2015 11/12/2019

0.7905 - 0.8621

9.4

10.0

USD

¥42,996.0

9/18/2014 12/11/2014

3/26/2015 7/31/2015

110.62 - 135.00

6.7

3.0

$30.6

$32.9

Notional Amount

(4)

(1) Hedge is held by KWE on its wholly-owned subsidiaries. (2) Hedge is held by KWR on its wholly-owned subsidiaries. (3) For the year ended December 31, 2014, $1.4 million recognized through results of operations due to portion of hedge not designated as a net investment hedge. (4) Hedges are presented gross in the consolidated balance sheet. Hedge assets are included in other assets and hedge liabilities are included in other liabilities.

P A G E

8 0

The table below details the currency forward contracts KW Group had as of December 31, 2013: Fair Value Liabilities

Change in Unrealized Losses

December 31,

Year Ended December 31,

Forward Rate/ Strike Price

2013

2013

1.2400 - 1.3816

$7.0

$(5.3)

(Currency amounts in millions)

Type

Underlying Currency

Notional Amount

Euro

Forward

USD

€96.0

GBP

Forward

USD

£ 25.5

Currency Hedged

Trade Date

Settlement/ Expiration Date

5/31/2012 12/17/2013 8/9/2013 8/23/2013

6/4/2015 12/19/2016 2/13/2014 8/28/2014

1.5479 - 1.5522

Total(1)

2.6

(2.6)

$9.6

$(7.9)

(1) Hedges are presented gross in the consolidated balance sheet. Hedge assets are included in other assets and hedge liabilities are included in other liabilities.

In order to manage currency fluctuations between KWR’s functional

spectively. The inputs used to value our senior notes payable, borrowings under

currency (U.S. dollar) and the functional currency of KWR’s wholly owned

lines of credit, mortgage loans payable and junior subordinated debentures are

subsidiaries (Japanese yen), KWR entered into forward and option foreign

based on observable inputs for similar assets and quoted prices in markets that

currency contracts to hedge a portion of its currency risk. Due to the consol-

are not active and are therefore determined to be level 2 inputs.

idation of KWR, the hedge asset relating to the forward and option foreign currency contracts was consolidated in KW Group’s financial statements at

NOTE 7—OTHER ASSETS

fair value.

Other assets consist of the following:

In order to manage currency fluctuations between KWE’s functional currency (GBP) and the functional currency of certain KWE’s wholly owned subsidiaries (Euro), KWE entered into forward foreign currency contracts to hedge a portion of its currency risk. Due to the consolidation of KWE, the hedge asset relating to the forward foreign currency contracts was consolidated at fair value. Fair value of financial instruments—The carrying amounts of cash and cash equivalents, accounts receivable including related party receivables, accounts payable, accrued expenses and other liabilities, accrued salaries and benefits,

December 31, (dollars in millions)

Above-market leases, net of accumulated amortization of $6.7 million at December 31, 2014 Deposits Other, net of accumulated amortization of $1.8 million and $1.2 million at December 31, 2014 and 2013, respectively Loan fees, net of accumulated amortization of $5.0 million and $4.5 million at December 31, 2014 and 2013, respectively Hedge Assets

2014

2013

71.6 49.9

$ — 5.3

25.8

7.7

36.0 30.6

14.1 —

and deferred and accrued income taxes approximate fair value due to their

Goodwill

23.9

23.9

short-term maturities. The carrying value of loans (excluding related party loans

Office furniture and equipment net of accumulated depreciation of $5.7 million and $2.2 million at December 31, 2014 and December 31, 2013, respectively

as they are presumed not to be an arm’s length transaction) approximates fair value as the terms are similar to loans with similar characteristics available in the market. KW Group accounts for its debt liabilities at face value plus net unamortized

22.0

10.4

Marketable securities(1)

6.5

4.0

Prepaid expenses Deferred tax asset, net

11.2 27.6

7.6 —

$305.1

$73.0

debt premiums and any fair value adjustments as part of business combinations. As of December 31, 2014 and 2013, the fair value of our senior notes payable, borrowings under lines of credit, and investment debt was estimated to be approximately $3,044.8 million and $878.2 million, respectively, based on a comparison of the yield that would be required in a current transaction, taking into consideration the risk of the underlying collateral and our credit risk to the current yield of a similar security, compared to their carrying value of $3,023.3 million and $850.8 million at December 31, 2014 and 2013, re-

(1) The amount above excludes Kennedy Wilson’s 20.2 million shares in KWE as the investment is eliminated due to the consolidation of KWE’s results. Based on the closing price of KWE shares on December 31, 2014, the fair value of Kennedy Wilson’s investment in KWE is $330.8 million.

Depreciation and amortization expense related to the above depreciable assets were $11.3 million, $4.0 million, and $1.6 million for the years ended December 31, 2014, 2013 and 2012, respectively.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(continued)

December 31, 2014, 2013 and 2012 NOTE 8—INVESTMENT DEBT

(dollars in millions)

Mortgage loans at December 31, 2014 and 2013 consist of the following: Carrying amount of investment debt as of December 31,(1)

(dollars in millions)

Types of Property Pledged as Collateral (1)

Multifamily Commercial Residential, Hotel, and Other Multifamily(1) Commercial Commercial(1)(2) Multifamily(1)(3) Residential, Hotel, and Other(1)(5) Commercial(1)(4)

Region

2014

2013

Western U.S. $ 565.5 131.0 Western U.S. 37.2 Western U.S Japan 242.9 2.1 Japan Ireland 412.5 Ireland 133.6 Ireland 101.9 United Kingdom 569.2

$261.0 110.4 28.0 — 2.4 — — — —

$2,195.9

$401.8

Investment Debt

(1) The mortgage loan payable balances include unamortized debt premiums. Debt premiums represent the excess of the fair value of debt over the principal value of debt assumed in various acquisitions and are amortized into interest expense over the remaining term of the related debt in a manner that approximates the effective interest method. The unamortized loan premium as of December 31, 2014 and 2013 was $15.4 million and $5.3 million.

2015 2016 2017 2018 2019 Thereafter Debt premium

$ 108.8 60.6 142.3 92.5 1,042.8 733.5 2,180.5 15.4 $2,195.9

NOTE 9—BORROWINGS UNDER LINES OF CREDIT KWH Facility—Kennedy Wilson has an unsecured revolving credit facility (“KWH Facility”) with U.S. Bank and East-West Bank and Bank of Ireland that bears interest at a rate equal to LIBOR plus 2.75% and has a maturity date of October 1, 2016. In July 2014 Kennedy-Wilson, Inc. increased its unsecured corporate line of credit facility from $140.0 million to $300.0 million. The increase was driven by the admission of Bank of America, N.A., Deutsche Bank AG New York Branch and J.P. Morgan Chase Bank, N.A. to the existing lender

(2) Includes $323.8 million of investment debt on properties that were acquired and held by KWE. Kennedy Wilson owns approximately 14.9% of the total issued share capital of KWE.

syndicate and an increased commitment from The Governor and Company of the Bank of Ireland.

(3) Includes $40.3 million of investment debt on properties that were acquired and held by KWE. Kennedy Wilson owns approximately 14.9% of the total issued share capital of KWE.

The revolving loan agreement that governs the unsecured credit facility was updated due to the increase in the facility. The updated facility requires

(4) Includes $483.0 million of investment debt on properties that were acquired and held by KWE. Kennedy Wilson owns approximately 14.9% of the total issued share capital of KWE.

Kennedy-Wilson, Inc. to maintain (i) a minimum rent, adjusted fixed charge coverage ratio (as defined in the revolving loan agreement) of not less

(5) Includes $14.6 million of investment debt on properties that were acquired and held by KWE. Kennedy Wilson owns approximately 14.9% of the total issued share capital of KWE.

than 1.50 to 1.00, measured on a four quarter rolling average basis and (ii) maximum balance sheet leverage (as defined in the revolving loan

The investment debt had a weighted average interest rate of 3.03% and

agreement) of not greater than 1.50 to 1.00, measured at the end of each

4.02% per annum at December 31, 2014 and 2013. As of December 31,

calendar quarter; (iii) an effective tangible net worth (as defined in the revolving

2014, 43% of KW Group’s property level debt is fixed rate, 38% is floating

loan agreement) equal to or greater than $500.0 million plus 50% of any equity

rate with interest caps and 19% is floating rate without interest caps. As

offerings after March 31, 2014, measured at the end of each calendar quarter;

of December 31, 2013, 86% of our property level debt is fixed rate, 7% is

and (iv) unrestricted cash, cash equivalents and publicly traded marketable

floating rate with interest caps and 7% is floating rate without interest caps.

securities in the aggregate amount of at least $40.0 million.

During the year ended December 31, 2014, 20 mortgage loans were

As of December 31, 2014, Kennedy Wilson’s adjusted fixed charge cover-

consolidated, 14 acquisitions were partially financed with mortgages, and

age ratio was 2.99 to 1.00, its balance sheet leverage ratio was 0.98 to 1.00,

three existing investments that closed all equity were subsequently partially

and its effective tangible net worth and its unrestricted cash, cash equivalents

financed with mortgages. See Note 4 for more detail on the acquisitions and

and publicly traded marketable securities were $944.2 million and $841.1

the investment debt associated with them.

million, respectively, and Kennedy-Wilson, Inc. was in compliance with these

The aggregate maturities of mortgage loans and notes payable subsequent to December 31, 2014 are as follows:

covenants. The revolving loan agreement also provides that any subsidiary guarantors under our 2042 Notes (as defined below) must provide guarantees of the loans drawn on our unsecured revolving credit facility. See Note 10 for a discussion of our senior notes.

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The average outstanding borrowings under the facility were $22.9 million

revolving loan agreement) not to exceed 60%; (ii) a minimum net asset value

and $14.9 million during the years ended December 31, 2014 and 2013,

where IFRS NAV (as defined in the KWE Facility agreement) is no less than

respectively. As of December 31, 2014 and 2013, there were $125.0 million

£744.4 million plus 75% of equity proceeds received by subsidiaries; (iii) a

and $0.0 million outstanding under the unsecured facility, respectively.

minimum fixed charge coverage ratio where consolidated EBITDA to consolidated fixed charges is no less than 1.5 to 1.0 for the last four quarters; (iv) a

KWE Facility—In August 2014, KWE entered into a three year unsecured floating rate revolving debt facility (“KWE Facility”) of approximately $350 million (£225 million) with a syndicate of banks. The facility was undrawn as of December 31, 2014 and expires in August of 2017. The KWE Facility requires KWE to maintain (i) a maximum consolidated leverage ratio (as defined in the

minimum unsecured interest where property level net operating income (“NOI”) and loan asset NOI to interest expense on unsecured debtors are no less than 1.9 to 1.0 for the last four quarters; and (v) a maximum secured recourse indebtedness for consolidated secured recourse debt of no more than 2.5% of total asset value at any time.

December 31, 2014

(dollars in millions)

December 31, 2013

Interest Rate

Maturity Date

Face Value

Unamortized Net Premium/ (Discount)

7.75% 5.88% 8.75%

12/1/2042 4/1/2024 4/1/2019

$ 55.0 650.0 —

$ — (2.6) —

$ 55.0 647.4 —

$ 55.0 — 350.0

$— — 4.0

$ 55.0 — 354.0

$705.0

$(2.6)

$702.4

$405.0

$4.0

$409.0

2042 Notes 2024 Notes 2019 Notes Senior Notes

NOTE 10—SENIOR NOTES

Carrying Value

Face Value

Unamortized Net Premium/ (Discount)

Carrying Value

In December 2012, the Issuer, in a private placement, issued $100.0 million

In March 2014, Kennedy Wilson completed a public offering of $300.0 million

aggregate principal amount of 8.750% Senior Notes due April 1, 2019 (the

aggregate principal amount of 5.875% Senior Notes, due April 1, 2024 (the

“2019 Notes”) for approximately $105.3 million, net of premium. The 2019 Notes

“2024 Notes”). The 2024 Notes were issued and sold at a public offering price

were issued as additional notes under an indenture dated as of April 5, 2011,

of 99.068% of their principal amount by Kennedy-Wilson, Inc. (the “Issuer”), a

among the Issuer; Kennedy Wilson, as parent guarantor; certain subsidiaries of

wholly owned subsidiary of Kennedy Wilson.

the Issuer, as subsidiary guarantors; and Wilmington Trust, National Association

In November 2014, the Company completed an additional public offering

(as successor by merger to Wilmington Trust FSB), as trustee, as thereafter

of $350.0 million aggregate principal amount of 5.875% Senior Notes, due

supplemented and amended. During 2011, the Issuer issued $200.0

2024. The additional 2024 Notes have substantially identical terms as the

million aggregate principal amount of its 2019 Notes on April 5, 2011 for

2024 Notes mentioned above, and are treated as a single series with the 2024

approximately $198.6 million, net of discount, and an additional $50.0 million

Notes under the 2024 Indenture. The additional 2024 Notes were issued and

aggregate principal amount of such notes on April 12, 2011 for approximately

sold at a public offering price of 100.0% of their principal amount, plus accrued

$50.8 million, net of premium. The additional notes had substantially identical

interest from, and including, October 1, 2014 by the Issuer. The amount of the

terms as the initial 2019 Notes and were treated as a single series under the

2024 Notes included in the accompanying consolidated balance sheets was

indenture.

$647.4 million at December 31, 2014.

In December 2012, Kennedy Wilson completed a public offering of $55.0

In November 2014, Kennedy Wilson used the proceeds from the 2024

million aggregate principal amount of 7.75% Senior Notes due 2042 (“2042

Notes November 2014 issuance, together with cash on hand, to extinguish its

Notes”). The 2042 Notes were issued and sold at a public offering price of

2019 Notes (as defined below) with an aggregate face value of $350.0 million

100% of their principal amount by Kennedy-Wilson, Inc. (the “Issuer”), a

(and an aggregate carrying value of $353.5 million) for $380.1 million which

wholly owned subsidiary of Kennedy Wilson. The amount of the 2042 Notes

resulted in a $25.8 million loss on early extinguishment of corporate debt. The

included in the accompanying consolidated balance sheets was $55.0 million

aggregate carrying value of the 2019 Notes included in the accompanying

at December 31, 2014 and 2013, respectively.

consolidated balance sheets, net of unamortized premiums and discounts was $0.0 million and $354.0 million at December 31, 2014 and 2013, respectively.

P A G E

8 3

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(continued)

December 31, 2014, 2013 and 2012

The indentures governing the 2024 Notes and the 2042 Notes contain

NOTE 13—INCOME TAXES

various restrictive covenants, including, among others, limitations on our ability

The table below represents the components of income (loss) before the provision

and the ability of certain of the Company’s subsidiaries to incur or guarantee

for income taxes. The Company generally invests in foreign real estate through

additional indebtedness, make restricted payments, pay dividends or make any

domestic partnerships and, as such, the (loss) income for foreign jurisdictions

other distributions from restricted subsidiaries, redeem or repurchase capital

generally represents the results of its foreign corporations. Additionally, the

stock, sell assets or subsidiary stocks, engage in transactions with affiliates,

table below is not reflective of the cash tax results of the Company.

create or permit liens on assets, enter into sale/leaseback transactions, and Year ended December 31,

enter into consolidations or mergers. The indentures governing the 2024 Notes and the 2042 Notes limits the ability of Kennedy Wilson and certain of its subsidiaries to incur additional indebtedness if, on the date of such incurrence and after giving effect to the new indebtedness, Kennedy Wilson’s maximum balance sheet leverage ratio (as defined in the indenture) is greater than

(dollars in millions)

Domestic Foreign Total

2014

2013

2012

$ 60.2 62.3

$27.4 (10.6)

$(3.7) 10.2

$122.5

$16.8

$ 6.5

1.50 to 1.00. This ratio is measured at the time of incurrence of additional indebtedness. As of December 31, 2014, the balance sheet leverage ratio

The (benefit from) provision for income taxes consisted of the following:

was 0.92 to 1.00. See Note 19 for the guarantor and non-guarantor financial

Year ended December 31,

statements.

(dollars in millions)

NOTE 11—JUNIOR SUBORDINATED DEBENTURES

Federal Current Deferred

In September 2014, Kennedy Wilson extinguished its junior subordinated debt with a face value of $40.0 million for $41.5 million which resulted in a $1.5 million loss on early extinguishment of corporate debt.

State Current Deferred

NOTE 12—RELATED PARTY TRANSACTIONS The firm of Solomon, Winnett & Rosenfield was paid $0.2 million annually for income tax services provided by the firm during the years ended December 31, 2014, 2013, and 2012. Jerry Solomon is a partner in the firm and a member of Kennedy Wilson’s Board of Directors. For the years ended December 31, 2014,

Foreign Current Deferred

2013, and 2012, Mr. Solomon was paid an immaterial amount of director’s fees.

Total

2014

2013

2012

$ — 31.0

$(0.1) 5.2

$ — (2.7)

31.0

5.1

(2.7)

0.1 5.2

— (0.1)

— 1.4

5.3

(0.1)

1.4

4.1 (8.0)

0.3 (2.4)

0.5 0.6

(3.9)

(2.1)

1.1

$32.4

$ 2.9

$(0.2)

The Company has a lease with an affiliate of a third-party shareholder for its corporate offices in Beverly Hills, California. As of December 31, 2014, the future minimum lease payments under this agreement is $0.6 million for 2015.

A reconciliation of the statutory federal income tax rate of 34% with Kennedy Wilson’s effective income tax rate is as follows:

The Company has a lease with an affiliate of a third-party shareholder for its corporate offices in Beverly Hills, California. Rental expense under this arrangement totaled $1.6 million and $1.3 million for the years ended

2014

2013

2012

Tax computed at the statutory rate State income taxes, net of federal benefit Foreign rate differential Adjustment to investment basis Noncontrolling interest and other Other Valuation allowance

$57.4

$46.0

$32.5

Provision for (benefit from) income taxes

$57.4

$46.0

$32.5

December 31, 2014 and 2013, respectively. The Company received fees and other income from affiliates and entities in which the Company holds ownership interests in the following amounts: Year ended December 31, (dollars in millions)

Property management and leasing fees Total related party revenue

P A G E

8 4

Year ended December 31, (dollars in millions)

2014

2013

2012

$41.8 2.7 3.7 2.0 (22.7) 4.9 —

$5.6 — 2.3 — (6.9) 2.0 (0.1)

$ 2.3 0.2 (2.4) — (0.9) 0.2 0.4

$ 32.4

$2.9

$(0.2)

Cumulative tax effects of temporary differences are shown below at

Company is able to repatriate such earnings in a tax free manner, or in the event of a change in the capital situation or investment strategy, it is possible that

December 31, 2014 and 2013:

the foreign subsidiaries may pay a dividend which would impact our effective Year Ended December 31, (dollars in millions)

2014

Deferred tax assets: Accrued reserves Stock option expense Marketable securities Net operating loss carryforward and credits Foreign currency translation

$ 0.3 4.2 0.3 40.9 91.5

Total deferred tax assets

137.2

2013

tax rate. Unremitted earnings of foreign subsidiaries, which have been, or are intended to be permanently invested, aggregated approximately $9.5 million as of December 31, 2014. If these subsidiaries’ earnings were repatriated to the

$

0.2 1.3 — 42.9 —

United States additional U.S. domestic taxes of $4.5 million would be incurred.

44.4

positions and has determined, based on its assessment, that such penalties, if

There were no gross unrecognized tax benefits at December 31, 2014 and 2013. Management has considered the likelihood and significance of possible penalties associated with Kennedy Wilson’s current and intended filing any, would not expected to be significant.

Deferred tax liabilities: Depreciation and amortization Prepaid expenses and other Investment basis and reserve differences Foreign currency translation Capitalized interest Valuation allowance Marketable securities

51.3 0.5 40.4 — 2.3 3.4 —

6.2 0.4 50.3 3.9 2.3 0.3 0.4

Hedging transactions

11.7

4.7

Total deferred tax liabilities

109.6

68.5

Deferred tax asset (liability), net

$ 27.6

$(24.1)

Based upon the level of historical taxable income and projections for future

Kennedy Wilson’s federal income tax returns remain open to examination for the years 2011 through 2013. For income tax purposes, distributions paid to common stockholders and preferred shareholder are return of capital for the year ended December 31, 2014. NOTE 14—COMMITMENTS AND CONTINGENCIES Future minimum lease payments under scheduled operating leases that have initial or remaining noncancelable terms in excess of one year are as follows: (dollars in millions)

taxable income over the periods which Kennedy Wilson’s gross deferred tax assets are deductible, management believes it is more likely than not Kennedy Wilson will

Year ending December 31,

2030. As of December 31, 2014 there were also California net operating loss

2015 2016 2017 2018 2019

carryforwards of approximately $87.6 million. The California net operating

Thereafter

$ 3.0 1.8 1.1 0.7 0.7 1.9

losses begin to expire after the year 2028. In addition, Kennedy Wilson has

Total minimum payments

$ 9.2

realize the benefits of these deductible differences at December 31, 2014. As of December 31, 2014 Kennedy Wilson had federal net operating losses of $95.2 million. These net operating losses begin to expire in the year

$4.7 million of other state net operating losses. We believe that it is more likely than not that certain state net operating losses will expire before the Kennedy

Rental expense was $4.3 million, $3.6 million, and $3.0 million for the years

Wilson can realize the benefit of the losses. We have provided a valuation

ended December 31, 2014, 2013, and 2012, respectively, and is included

allowance of $0.8 million as of December 31, 2014 for certain state net

in general and administrative expense in the accompanying consolidated

operating losses. As of December 31, 2014, Kennedy Wilson had $47.9 million

statements of operations.

of foreign net operating losses carryforwards of which $3.0 million begin to expire in 2030 and $44.9 million have no expiration date. We have provided a valuation allowance of $14.7 million as of December 31, 2014 for certain foreign net operating losses. Presently a deferred tax liability for undistributed earnings of subsidiaries located outside the United States has not been recorded. These earnings may become taxable upon a payment of a dividend or as a result of a sale or liquidation of the subsidiaries. At this time the Company does not have plans to

GUARANTEES—The Company has provided guarantees associated with loans secured by assets held in various joint venture partnerships. The maximum potential amount of future payments (undiscounted) the Company could be required to make under the guarantees were approximately $54.9 million at December 31, 2014. The guarantees expire by the year end of 2021 and Kennedy Wilson’s performance under the guarantees would be required to the extent there is a shortfall in liquidation between the principal amount of the loan and the net sales proceeds of the property.

repatriate income from its foreign subsidiaries, however to the extent that the

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(continued)

December 31, 2014, 2013 and 2012 CAPITAL COMMITMENTS—As of December 31, 2014 and 2013, the

60% in the fifth year of the award period. Vesting of the restricted share awards

Company has unfunded capital commitments to its joint ventures in the

is contingent upon the expected achievement of a performance target in each

amounts of $33.1 million and $8.0 million.

year of the award period with the initial vesting of the first 10% in January

EMPLOYMENT AGREEMENTS—Kennedy Wilson has entered into

2013. The performance targets were achieved for 2012, 2013 and 2014.

employment agreements with its Chief Executive Officer (“CEO”), its President

From inception of the plan through December 31, 2014, 606,566 shares have

and Chief Executive Officer of its European operations (“CEO - Europe”), its

vested and 112,500 shares have been forfeited. As of December 31, 2014,

Chief Financial Officer (“CFO”), its Executive Vice President (“EVP”), and its

there was $33.0 million of unrecognized compensation cost for the Equity Plan

Executive Vice President and General Counsel (“EVP, GC”). The CEO and CEO -

related to unvested restricted shares which will vest over the next three years.

Europe have base salaries of $1.5 million and $1.0 million, respectively through

In July of 2014, Kennedy Wilson adopted and its shareholders approved the

August 6, 2021. The CFO, EVP, and EVP, GC have base salaries of $0.6 million,

Amended and Restated 2009 Equity Participation Plan under which an additional

$0.6 million and $0.8 million, respectively through December 29, 2019.

6 million shares of common stock have been reserved for restricted stock grants

Additionally, the employment agreements provide for the payment of an

to officers, employees, non-employee directors and consultants. The terms of the

annual discretionary bonus and participation in equity awards approved in an

awards granted under the 2009 Amended and Restated Equity Participation Plan

amount determined in the sole and absolute discretion of the Compensation

are set by the Company’s compensation committee at its discretion. The shares

Committee of the board of directors.

will vest ratably over a five-year year period based on the achievement of certain

LITIGATION—Kennedy Wilson is currently a defendant in certain routine

performance targets. The performance periods over which the Company’s return

litigation arising in the ordinary course of business. It is the opinion of

on equity will be measured for the awards will be the Company’s fiscal years

management and legal counsel that the outcome of these actions will not

ending December 31, 2014, 2015, 2016, 2017 and 2018. During the year ended

have a material effect on the financial statements taken as a whole.

December 31, 2014, 3.3 million shares of restricted common stock were granted

NOTE 15—STOCK COMPENSATION PLANS In November 2009, Kennedy Wilson adopted the 2009 Equity Participation Plan (“the Equity Plan”) that allows for the grant of up to approximately 2.5 million shares of common stock. As of December 31, 2014 all the restricted share awards were granted to employees, which vest ratably over a five year period. Vesting of the restricted share awards is contingent upon the expected achievement of a performance target as of the initial vesting date of November 13, 2010 and each of the next four years thereafter. The performance targets were achieved for 2011, 2012, 2013 and 2014. From inception of the plan through December 31, 2014, 2,526,119 shares have vested and 60,125 shares have been forfeited. The Company re-granted the forfeited shares in 2013. The restricted share awards are recognized as expense on a tranche by tranche basis over the five year performance period. As of December 31, 2014, there was $1.0 million of unrecognized compensation cost for the Equity Plan related to unvested restricted shares.

under the Amended and Restated Plan. From inception of the plan through December 31, 2014, no shares had vested or been forfeited. As of December 31, 2014, there was $72.3 million of unrecognized compensation cost for the Equity Plan related to unvested restricted shares which will vest over the next five years. During the years ended December 31, 2014, 2013 and 2012, Kennedy Wilson recognized $15.8 million, $7.5 million and $8.1 million of compensation expense related to the vesting of restricted common stock and is included in compensation and related expense in the accompanying consolidated statements of operations. During 2013, the Company modified the Amended and Restated Plan to remove an external performance component associated with the vesting of awards. This modification changed the accounting treatment of the Amended and Restated Plan to be equity based as opposed to liability based. Due to this change, $4.7 million was reclassified from a liability to equity during the year ended December 31, 2013. The following table sets forth activity under the Equity Plan and Amended and Rested Plan:

In June 2012, Kennedy Wilson adopted and its shareholders approved the Amended and Restated 2009 Equity Participation Plan (the “Amended and Restated Plan”) under which an additional 3.2 million shares of common

Shares

non-employee directors and consultants. The terms of the awards granted

Nonvested at December 31, 2012 Granted Vested

under the 2009 Amended and Restated Equity Participation Plan are set by the

Forfeited

Company’s compensation committee at its discretion. During the year ended

Nonvested at December 31, 2013 Granted Vested

stock have been reserved for restricted stock grants to officers, employees,

December 31, 2012, 3.2 million shares of restricted common stock were granted under the Amended and Restated Plan along with 5,000 shares which remained under the original plan. The shares vest over five years with 40% vesting ratably in the first four years of the award period and the remaining

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Forfeited Nonvested at December 31, 2014

4,189,964 136,600 (822,724) (146,638) 3,357,202 3,147,500 (855,494) (2,475) 5,646,733

Employee Benefit Arrangements—Kennedy Wilson has a qualified plan under

or group files a Schedule 13D. This change of control provision is within Kennedy

the provisions of Section 401(k) of the Internal Revenue Code. Under this plan,

Wilson’s control as the Board of Directors, at its discretion, would be able to

participants are able to make salary deferral contributions of up to 75% of their

issue blank check Preferred Stock at any time for any reason which could dilute

total compensation, up to a specified maximum. The 401(k) plan also includes

the person or group to below the 35% of the voting control threshold. As such,

provisions which authorize Kennedy Wilson to make discretionary contributions.

Kennedy Wilson has concluded that the change of control is within the control of

During the years ended December 31, 2014, 2013 and 2012, Kennedy Wilson

Kennedy Wilson and therefore has classified the Preferred Stock as permanent

made matching contributions of $0.2 million, $0.2 million, and $0.2 million,

equity in the accompanying consolidated balance sheets.

respectively to this plan and they are included in compensation and related expenses in the accompanying consolidated statements of operations. NOTE 16—EQUITY

In connection with the issuance of the Preferred Stock, Kennedy Wilson entered into registration rights agreements that allow for the holders of the Preferred Stock, with at least a 51% vote, to demand registration of the Preferred Stock (or converted common stock) on or after November 13, 2010.

Common Stock—In January 2014, Kennedy Wilson completed an offering

If Kennedy Wilson does not satisfy the demand for registration, the holders of

of 9.2 million shares of its common stock, which raised $190.6 million of net

the Preferred Stock (or converted common stock) would be entitled to receive a

proceeds.

payment in an amount equal to 1.50% per annum of the liquidation preference

In September 2013, Kennedy Wilson completed an offering of 6.9 million shares of its common stock, which raised $122.0 million of net proceeds. In March 2013, Kennedy Wilson completed an offering of 9.0 million shares of its common stock, which raised $133.8 million of net proceeds. In April 2013, Kennedy Wilson issued approximately 1.4 million shares of its common stock as a result of the underwriters fully exercising their option to purchase additional shares, which resulted in net proceeds of $20.1 million. In July 2012, Kennedy Wilson completed a follow-on offering of 8.6 million shares of its common stock, which raised $106.2 million of net proceeds. Preferred Stock—During 2010, Kennedy Wilson issued two series of Convertible

of $1,000 per share. There are sufficient shares of unregistered common stock authorized and unissued to accommodate the conversion feature. Warrants—In April 2010, the Board of Directors authorized a warrant repurchase program enabling Kennedy Wilson to repurchase up to 12.5 million of its outstanding warrants. The warrants carry an exercise price of $12.50 with an expiration date of November 14, 2014. On December 20, 2013, Kennedy Wilson redeemed 6,963 warrants at a price of $0.01 per warrant since the share price of its common stock exceeded $19.50 per share for 20 trading days within a 30 trading day period ending on the third business day prior to the notice of redemption to warrant holders.

Cumulative Preferred Stock (together “the Preferred Stock”) at 1,000 per share,

During the years ended December 31, 2013 and 2012, Kennedy Wilson

series A (100,000 shares) and series B (32,550 shares), for total proceeds less

repurchased a total of 0.4 million and 0.6 million of its outstanding warrants

issuance costs of $99.8 million and $32.5 million. The series A Preferred Stock

for total consideration of $1.4 million and $1.6 million. The Company received

is convertible into common stock at any time at the option of the holder prior to

$15.4 million from warrant holders due to the exercise of 2.7 million warrants

May 19, 2015 at a price of $12.41 per share and is mandatorily convertible into

during 2013. The remaining 2.7 million warrants outstanding were exercised

common stock on May 19, 2015. The series B Preferred Stock is convertible into

on a cashless basis on November 14, 2014 for 1.5 million common shares. As

common stock at any time at the option of the holder prior to November 3, 2018

of December 31, 2014 there were no warrants outstanding.

at a price of $10.70 per share and is mandatorily convertible into common stock on November 3, 2018. The series A and series B Preferred Stock have dividend rates of 6.0% and 6.452% payable quarterly.

Dividend Distributions—Kennedy Wilson declared and paid the following cash dividends on its common and preferred stock:

The certificate of designations of the Preferred Stock contain provisions that require Kennedy Wilson to commence an offer to purchase all shares of the

(dollars in millions)

Declared

Preferred Stock at a purchase price in cash per share of Preferred Stock equal to $1,150 plus all accumulated and accrued dividends upon the occurrence of a fundamental change, defined as a change of control. The parties have agreed that a change of control is deemed to occur when any person or group other than the purchaser of the Preferred Stock and its affiliates, or any officer or director of Kennedy Wilson as of the issue date of the Preferred Stock, acquires directly or

Year Ended December 31, 2014

Preferred Stock Series A Series B Total Preferred Stock Common Stock

Year Ended December 31, 2013

Paid

Declared

Paid

$ 6.0

$ 6.0

$ 6.0

$ 6.0

2.1

2.1

2.1

2.1

8.1

8.1

8.1

8.1

33.6

30.8

21.8

16.0

$41.7

$38.9

$29.9

$24.1

indirectly voting control or direction over more than 35% of the voting control of

Total(1)

Kennedy Wilson for a period of seven consecutive days following the earlier of the

(1) The difference between declared and paid is the amount accrued on the consolidated balance sheets.

date the Company becomes aware of such acquisition and the date such person

P A G E

8 7

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(continued)

December 31, 2014, 2013 and 2012 Accumulated Other Comprehensive Income—The following table summarizes the changes in each component of accumulated other comprehensive income (loss) (“AOCI”), net of 40% estimated tax:

(dollars in millions)

Balance at December 31, 2013 Unrealized (losses) gains, arising during the period Amounts reclassified out of AOCI during the period Taxes on unrealized (losses) gains, arising during the period Noncontrolling interest Balance at December 31, 2014

The local currencies for our interests in foreign operations include the euro, the British pound sterling, and the Japanese yen. The related amounts on our balance sheets are translated into U.S. dollars at the exchange rates at the respective financial statement date, while amounts on our statements of operations are translated at the average exchange rates during the respective period. The increase in the unrealized losses on foreign currency translation is a result of the strengthening of the U.S. dollar against the Japanese yen, euro and British pound sterling during the year ended December 31, 2014. In order to manage currency fluctuations, KWR entered into forward foreign currency contracts to hedge a portion of its Japanese yen-based investments. The Company also has currency forward contracts to manage its exposure to currency fluctuations between its functional currency (U.S. dollars) and the functional currency (euros and GBP) of certain of its investments in Europe (see note 7 for more detail). As a result of the consolidations of KWR and six separate joint ventures that hold real estate-related investments located in the U.K. and Ireland the Company has reclassified $7.1 million out of AOCI and recognized a gain in acquisition-related gain in the accompanying consolidated statements of

Foreign Currency Translation

$

4.3 (233.6) (0.3) 92.8

Foreign Currency Derivatives

Marketable Securities

$ 4.9 44.9 (6.8) (18.0)

$ — (0.4) — 0.2

Total Accumulated Other Comprehensive Income

$ 9.2 $ (189.1) (7.1) 75.0

94.4

(10.6)

—

83.8

$ (42.4)

$ 14.4

$(0.2)

$ (28.2)

of other comprehensive losses and made distributions of $57.7 million to noncontrolling interest holders. NOTE 17—EARNINGS PER SHARE Under FASB ASC Topic 260-10-45 Earnings Per Share, the Company uses the two-class method to calculate earnings per share. Basic earnings per share is calculated based on dividends declared (“distributed earnings”) and the rights of common shares and participating securities in any undistributed earnings, which represents net income remaining after deduction of dividends declared during the period. Participating securities, which include unvested restricted stock, are included in the computation of earnings per share pursuant to the two-class method. The undistributed earnings are allocated to all outstanding common shares and participating securities based on the relative percentage of each security to the total number of outstanding securities. Basic earnings per common share and participating securities represent the summation of the distributed and undistributed earnings per common share and participating security divided by the total weighted average number of common shares outstanding and the total weighted average number of participating securities outstanding during the respective periods. We only present the earnings per

operations.

share attributable to the common shareholders. Noncontrolling Interests—Noncontrolling interests consist of the ownership

Net losses, after deducting the dividends to participating securities, are

interests of noncontrolling shareholders in consolidated subsidiaries and are

allocated in full to the common shares since the participating security holders

presented separately on the balance sheet. As of December 31, 2014 and

do not have an obligation to share in the losses, based on the contractual

2013 the Company has noncontrolling interest of $2.1 billion and $50.6

rights and obligations of the participating securities. Because KW Group

million. The increase in noncontrolling interests during 2014 is primarily

incurred losses for years ended December 31, 2013 and 2012, all potentially

due to the Company’s investment in and consolidation of KWE as well as

dilutive instruments are anti-dilutive and have been excluded from our

the consolidations of KWR and the six joint venture investments that hold

computation of weighted average dilutive shares outstanding for that period.

real estate in United Kingdom and Ireland discussed above. Kennedy

The following is a summary of the elements used in calculating basic and

Wilson recorded an increase $1.9 billion for the issuance of KWE shares

diluted income (loss) per share for the years ended December 31, 2014,

and $291.8 million for the consolidation of the joint ventures mentioned

2013, and 2012:

above. The Company also allocated $68.2 million of income, $83.8 million

P A G E

8 8

The following table sets forth the computation of basic and diluted earnings per share: Year ended December 31,

2013

2014

(dollars in millions, except share amounts and per share data)

Net income (loss) attributable to Kennedy-Wilson Holdings, Inc. common shareholders

$

13.8

$

(14.5) $

2012 (3.9)

Net income and dividends allocated to participating securities

(1.4)

(0.9)

(0.5)

Net income (loss) attributable to Kennedy-Wilson Holdings, Inc. common shareholders, net of allocation to participating securities

12.4

(15.4)

(4.4)

Dividends declared on common shares

(32.3)

(20.9)

(11.3)

Undistributed (losses) earnings attributable to Kennedy-Wilson Holdings, Inc. common shareholders

$

(19.9) $

(36.3) $

(15.7)

Distributed earnings per share Undistributed (losses) earnings per share

$

0.36 $ (0.22)

0.28 $ (0.49)

0.20 (0.27)

Income (loss) per basic Income (loss) per diluted Weighted-average shares outstanding for basic Weighted average shares outstanding for diluted Dividends declared per common share

0.14 0.14 89,200,855 91,555,214 $ 0.36 $

(0.21) (0.07) (0.21) $ (0.07) 71,159,919 55,285,833 71,159,919 55,285,833 $ 0.28 $ 0.20 $

The dilutive shares from convertible securities have not been included in

Wilson also has an ownership interest. The amounts representing investments

the diluted weighted average shares as Kennedy Wilson for the year ended

with related parties and non-affiliates are included in the investment segment.

December 31, 2014 as they are anti-dilutive. For the years ended December

No single third party client accounted for 10% or more of Kennedy Wilson’s

31, 2013 and 2012 the dilutive shares for warrants, convertible securities,

revenue during any period presented in these financial statements.

and unvested shares have not been included as they are anti-dilutive. There was a total of 11,100,074, 13,494,478 and 19,339,021 potentially dilutive securities as of December 31, 2014 2013 and 2012 not included as part of the calculation above as they were anti-dilutive.

KW Services—KW Services offers a comprehensive line of real estate services for the full lifecycle of real estate ownership to clients that include financial institutions, institutional investors, insurance companies, developers, builders and government agencies. KW Services has four

NOTE 18—SEGMENT INFORMATION

main lines of business: investment management, property services,

Kennedy Wilson’s business is defined by two core segments: KW Investments

research and auction and conventional sales. These four business lines

and KW Services. KW Investments invests in multifamily, residential and

generate revenue for us through fees and commissions. See the “Business

commercial properties as well as loans secured by real estate. KW Services

Segments” section in Item 1 for a more detailed discussion of the different

provides a full array of real estate-related services to investors and lenders,

components of the KW Services segment.

with a strong focus on financial institution-based clients. Kennedy Wilson’s

The Company manages over 71 million square feet of properties for

segment disclosure with respect to the determination of segment profit or

institutional clients and individual investors in the United States, Europe, and

loss and segment assets is based on these services and investments.

Japan, which includes assets we have ownership in and third party assets. With 25 offices throughout the United States, the United Kingdom, Ireland,

KW Investments—Kennedy Wilson invests its capital in real estate assets and loans secured by real estate either on its own or with strategic partners through KWE, joint ventures, separate accounts, and commingled funds. The Company is typically the general partner or external manager in these joint ventures with a promoted interest in the profits or appreciation of our investments beyond our ownership percentage. The Company has an average ownership interest across all investments of approximately 32%. Our equity partners include public shareholders financial institutions, foundations, endowments, high net worth individuals and other institutional investors. See the “Business Segments” section in Item 1 for a more detailed discussion of the different components of the KW Investments segment. Substantially all of the revenue—related party was generated via inter-

Spain, Jersey and Japan the Company has the capabilities and resources to provide property services to real estate owners as well as the experience, as a real estate investor, to understand client concerns. The managers of KW Services have an extensive track record in their respective lines of business and the real estate community as a whole. The Company believes their knowledge and relationships is an excellent driver of business through the services business as well as on the investment front. Additionally, KW Services plays a critical role in supporting the company’s investment strategy by providing local market intelligence and real-time data for evaluating investments, generating proprietary transaction flow and creating value through efficient implementation of asset management or repositioning strategies.

segment activity for the years ended December 31, 2014, 2013 and 2012. Generally, this revenue consists of fees earned on investments in which Kennedy

K E N N E D Y - W I L S O N

H O L D I N G S ,

I N C .

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(continued)

December 31, 2014, 2013 and 2012 The following tables summarize the income and expense activity by segment for the years ended December 31, 2014, 2013 and 2012 and total assets as of December 31, 2014, 2013 and 2012. Year Ended December 31,

2014

(dollars in millions)

Investments Rental and hotel Loans and other income Sale of real estate

$ 270.2 28.4 17.4

Total revenue Depreciation and amortization Operating Expenses

Net income

8.5 2.8 2.3 13.6 (4.4) (36.9)

48.3

41.4

27.9

58.2 218.1 (19.7) (46.3)

9.9 56.6 (1.6) (11.8)

0.2 25.5 (0.7) (2.5)

5.1

(2.2)

7.0

215.4

50.9

29.5

(73.6)

(20.3)

(2.5)

Net income attributable to the non-controlling interests Net income attributable to Kennedy-Wilson Holdings, Inc. common shareholders

$ 43.0 $ 1.9 10.1 55.0 (17.4) (69.1)

Other

$ 141.8

$ 30.6 $ 27.0

Year Ended December 31,

2014

(dollars in millions)

Services Investment management, property services and research fees (includes $57.4, $46.0, and $32.5 million of related party fee, respectively) Total revenue Operating expenses Depreciation and amortization Income from unconsolidated investments Net Income

2012

$82.6

$68.1

$53.3

82.6 (61.1) — 5.9

68.1 (40.7) — —

53.3 (33.1) (0.2) —

27.4

27.4

20.0

5.4

—

—

$32.8

$27.4

$20.0

Net loss attributable to the noncontrolling interests Net income attributable to Kennedy-Wilson Holdings, Inc. common shareholders

2013

2014

2013

2012

Corporate Operating expenses Depreciation and amortization

(35.8) —

21.9

16.7 0.3

Operating loss Interest income Interest expense - corporate

(35.8) — (57.1)

(21.9) 0.3 (39.9)

(17.0) 0.2 (26.1)

2012

316.0 (104.5) (201.6)

Income from unconsolidated investments Operating Income Acquisition-related gains Acquisition-related expenses Interest expense-investment

2013

Year Ended December 31, (dollars in millions)

Loss on extinguishment of corporate debt

(27.3)

—

—

Loss before (provision for) income taxes (Provision for) benefit from income taxes

(120.2)

(61.5)

(32.4)

(2.9)

(42.9) 0.2

Net loss Preferred dividends and accretion of preferred stock issuance costs

(152.6)

(64.4)

(42.7)

(8.1)

(8.1)

(8.1)

Net loss attributable to Kennedy-Wilson Holdings, Inc. common shareholders

Year Ended December 31,

2013

2012

Consolidated Investment management, property services and research fees (includes $57.4, $46.0, and $32.5 million of related party fee, respectively) Rental and other income Sale of real estate Loans and Other Income

$82.6 270.2 28.4 17.4

$ 68.1 43.0 10.1 1.9

$53.3 8.5 2.3 2.8

Total revenue Operating expenses

398.6 298.6

123.1 131.7

66.9 86.6

Depreciation and amortization

104.5

17.4

4.9

Total operating expenses

403.1

149.1

91.5

Income from unconsolidated investments

54.2

41.4

27.9

Operating income

49.7

15.4

3.3

218.1 (19.7) (46.3) (57.1) (27.3)

56.6 (1.6) (11.8) (39.9) —

25.5 (0.7) (2.5) (26.1) —

5.1

(1.9)

7.0

Acquisition-related gains Acquisition-related expenses Interest expense - investment Interest expense - corporate Loss on extinguishment of corporate debt

122.5

16.8

6.5

(Provision for) benefit from income taxes

(32.4)

(2.9)

0.2

Net income Net income attributable to the noncontrolling interests

90.1

13.9

6.7

Income before benefit from income taxes

H O L D I N G S ,

I N C .

$(72.5) $(50.8)

2014

(dollars in millions)

Other

K E N N E D Y - W I L S O N

$(160.7)

(68.2)

(20.3)

(2.5)

Preferred dividends and accretion of preferred stock issuance costs

(8.1)

(8.1)

(8.1)

Net income (loss) attributable to KennedyWilson Holdings, Inc. common shareholders

$ 13.8

$(14.5)

$ (3.9)

December 31,

NOTE 19—GUARANTOR AND NON-GUARANTOR FINANCIAL STATEMENTS

2014

2013

Assets Investments Services Corporate

$6,017.9 60.2 254.0

$1,537.4 132.6 128.8

consolidating financial information includes:

Total assets

$6,332.1

$1,798.8

comprehensive (loss) income for the years ended December 31, 2014, 2013,

(dollars in millions)

The following consolidating financial information and condensed (1) Condensed consolidating balance sheets as of December 31, 2014 and 2013, respectively; consolidating statements of operations and and 2012, respectively; and condensed consolidating statements of cash flows December 31,

(dollars in millions)

Expenditures for long lived assets Investments

2014

2013

2012

$(1,962.2)

$(168.5)

$(119.0)

Geographic Information:

for the years ended December 31, 2014, 2013, and 2012, respectively, of (a) Kennedy-Wilson Holdings, Inc. on an unconsolidated basis as the parent (and guarantor), (b) Kennedy-Wilson, Inc., as the subsidiary issuer, (c) the guarantor subsidiaries, (d) the non-guarantor subsidiaries and (e) KennedyWilson Holdings, Inc. on a consolidated basis; and

The revenue shown in the table below is allocated based upon the country

(2) Elimination entries necessary to consolidate Kennedy-Wilson Holdings, Inc., as the parent guarantor, with Kennedy-Wilson, Inc. and its

in which services are performed.

guarantor and non-guarantor subsidiaries Year Ended December 31, (dollars in millions)

2014

2013

2012

United States Europe Japan

$174.9 209.2 14.5

$ 87.6 35.1 0.4

$47.2 19.2 0.5

Total Revenue

$398.6

$123.1

$66.9

P A G E

9 1

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(continued)

December 31, 2014, 2013 and 2012

As of December 31, 2014

(dollars in millions)

Condensed Consolidating Balance Sheet Assets Cash and cash equivalents Cash held by consolidated investments Accounts receivable Loans Real estate and acquired in place lease values, net of accumulated depreciation and amortization Unconsolidated investments Investments in and advances to consolidated subsidiaries Other assets Total Assets Liabilities Accounts payable, accrued expenses and other liabilities Senior notes payable Investment debt Line of credit Total liabilities Equity Kennedy-Wilson Holdings, Inc. shareholders’ equity Noncontrolling interests Total equity Total liabilities and equity

P A G E

9 2

Parent

$

— — — — — — 909.8

KennedyWilson, Inc.

$

38.2 — — 38.5 — 9.3 1,655.0

Guarantor Subsidiaries

$

Non-guarantor Subsidiaries

21.0 — 31.5 20.6

$ 115.4 763.1 24.1 292.1

474.5 328.7 1,065.6

3,753.6 154.2 —

Elimination

$

Consolidated Total

— — — (37.8)

$ 174.6 763.1 55.6 313.4

— — (3,630.4)

4,228.1 492.2 —

—

63.7

40.6

200.8

—

305.1

$909.8

$1,804.7

$1,982.5

$5,303.3

$(3,668.2)

$ 6,332.1

8.7 — — —

67.5 702.4 — 125.0

79.2 — 248.3 —

109.5 — 1,985.4 —

— — (37.8) —

264.9 702.4 2,195.9 125.0

8.7

894.9

327.5

2,094.9

(37.8)

3,288.2

901.1 —

909.8 —

1,655.0 —

1,065.6 2,142.8

(3,630.4) —

901.1 2,142.8

901.1

909.8

1,655.0

3,208.4

(3,630.4)

3,043.9

$909.8

$1,804.7

$1,982.5

$5,303.3

$(3,668.2)

$6,332.1

As of December 31, 2014

(dollars in millions)

Condensed Consolidating Balance Sheet

Parent

KennedyWilson, Inc.

Guarantor Subsidiaries

Non-guarantor Subsidiaries

Elimination

Consolidated Total

Assets Cash and cash equivalents Cash held by consolidated investments Accounts receivable Intercompany receivables Loans Real estate and acquired in place lease values, net of accumulated depreciation and amortization Unconsolidated investments Investments in and advances to consolidated subsidiaries Other assets Total Assets

$

— — — — —

$

— — 775.1

48.2 — 1.1 9.0 59.7

$

— 7.5 1,141.9

77.2 — 7.0 — 53.7

$ 44.8 8.0 8.5 — 0.8

145.3 598.0 326.6

542.8 180.6 —

$

— — — (9.0) (57.4)

$

— — (2,243.6)

170.2 8.0 16.6 — 56.8 688.1 786.1 —

—

20.9

31.4

20.7

—

73.0

$775.1

$ 1,288.3

$1,239.2

$ 806.2

$ (2,310.0)

$ 1,798.8

$ 6.8 —

$

$

$ 35.2 $ 9.0

Liabilities Accounts payable, accrued expenses and other liabilities Intercompany payables Senior notes payable Intercompany loans payable Investment debt Junior subordinated debentures Total liabilities

— — —

64.2 — 409.0 — —

22.9 — — — 74.4

— 57.4 327.4

— (9.0) — (57.4) —

$

129.1 — 409.0 — 401.8

—

40.0

—

—

—

40.0

6.8

513.2

97.3

429.0

(66.4)

979.9

768.3

775.1

1,141.9

326.6

(2,243.6)

768.3

Equity Kennedy-Wilson Holdings, Inc. shareholders' equity Noncontrolling interests Total equity Total liabilities and equity

—

—

—

50.6

—

50.6

768.3

775.1

1,141.9

377.2

(2,243.6)

818.9

$775.1

$ 1,288.3

$ 1,239.2

$ 806.2

$ (2,310.0)

$ 1,798.8

K E N N E D Y - W I L S O N

H O L D I N G S ,

I N C .

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(continued)

December 31, 2014, 2013 and 2012

(dollars in millions)

Consolidating Statement of Operations

Parent

KennedyWilson, Inc.

$ —

$

Guarantor Subsidiaries

For the Year Ended December 31, 2014 Non-guarantor Consolidated Subsidiaries Elimination Total

Revenue Investment management, property services, and research fees

—

$ 78.9

—

$82.6

Rental and hotel Loans and other income

— —

— 0.1

20.4 2.0

$

249.8 15.3

3.7

$

— —

270.2 17.4

Sale of real estate

—

—

0.7

27.7

—

28.4

Total revenue

—

0.1

102.0

296.5

—

398.6

Commission and marketing expenses Rental and hotel operating expense Cost of real estate sold Compensation and related expenses General and administrative Depreciation and amortization

— — — 15.9 — —

— — — 52.8 12.4 0.9

4.4 — 0.7 38.1 15.8 12.2

1.2 116.4 20.0 7.0 13.9 91.4

— — — — — —

5.6 116.4 20.7 113.8 42.1 104.5

Total operating expenses Income from unconsolidated investments

15.9 —

66.1 3.4

71.2 39.0

249.9 11.8

— —

403.1 54.2

106.0

278.4

215.5

—

(599.9)

—

90.1

215.8

285.3

58.4

(599.9)

49.7

— — — — — —

(7.0) — (56.3) — (27.3) 0.2

3.7 (2.3) — (6.8) — 1.5

221.4 (17.4) (0.8) (39.5) — 3.4

— — — — — —

218.1 (19.7) (57.1) (46.3) (27.3) 5.1

90.1

125.4

281.4

225.5

(599.9)

122.5

—

(19.4)

(3.0)

(10.0)

—

(32.4)

90.1 — 90.1 (8.1)

106.0 — 106.0 —

278.4 — 278.4 —

215.5 (68.2) 147.3 —

(599.9) — (599.9) —

90.1 (68.2) 21.9 (8.1)

$82.0

$106.0

$278.4

$147.3

$(599.9)

$ 13.8

Operating expenses

Income (loss) from consolidated subsidiaries Operating income (loss)

Non-operating income (expense) Acquisition-related gains Acquisition-related expenses Interest expense - corporate debt Interest expense - investment Loss on early extinguishment of corporate debt Other income (expense) Income (loss) from continuing operations before benefit (provision for) from income taxes (Provision for) benefit from income taxes Net income (loss) Net loss attributable to the noncontrolling interests Net income (loss) attributable to Kennedy-Wilson Holdings, Inc. Preferred stock dividends and accretion of issuance costs Net income (loss) attributable to Kennedy-Wilson Holdings, Inc. common shareholders

K E N N E D Y - W I L S O N

H O L D I N G S ,

I N C .

For the Year Ended December 31, 2013

(dollars in millions)

Consolidating Statement of Operations

Parent

KennedyWilson, Inc.

Guarantor Subsidiaries

Non-guarantor Subsidiaries

Elimination

Consolidated Total

Revenue Investment management, property services, and research fees

$—

$0.4

$26.9

$40.8

—

$ 68.1

Rental and hotel Loans and Other Income

— —

0.1 —

6.7 1.9

36.2 —

$

— —

43.0 1.9

Sale of real estate

—

—

10.1

—

—

10.1

Total revenue

—

0.5

45.6

77.0

—

123.1

— — — 7.5 0.3

0.3 — — 31.9 9.4

2.9 3.5 7.9 14.8 5.1

0.4 15.4 — 22.5 9.8

— — — — —

3.6 18.9 7.9 76.7 24.6

Operating expenses Commission and marketing expenses Rental and hotel operating expenses Cost of real estate sold Compensation and related expenses General and administrative Depreciation and amortization

—

0.9

4.8

11.7

—

17.4

Total operating expenses Income from unconsolidated investments

7.8 —

42.5 2.9

39.0 52.1

59.8 (13.6)

— —

149.1 41.4

21.7

105.4

51.3

—

(178.4)

—

13.9

66.3

110.0

3.6

(178.4)

15.4

— — — —

— (0.2) (39.9) —

— (0.4) — (1.8)

56.6 (1.0) — (10.0)

— — — —

56.6 (1.6) (39.9) (11.8)

Income from consolidated subsidiaries Operating income (loss)

Non-operating income (expense) Acquisition related gain Acquisition-related expenses Interest expense - corporate debt Interest expense - investment Other income (expense)

—

0.4

(2.4)

0.1

—

(1.9)

13.9

26.6

105.4

49.3

(178.4)

16.8

—

(4.9)

—

2.0

—

(2.9)

13.9

21.7

105.4

51.3

(178.4)

13.9

—

—

—

(20.3)

—

(20.3)

Net income (loss) attributable to Kennedy-Wilson Holdings, Inc.

13.9

21.7

105.4

31.0

(178.4)

(6.4)

Preferred dividends and accretion of preferred stock issuance costs

(8.1)

—

—

—

—

(8.1)

$5.8

$21.7

$105.4

$31.0

$(178.4)

$(14.5)

Income (loss) before benefit from income taxes Benefit from income taxes Net income (loss) Net income attributable to the noncontrolling interests

Net income (loss) attributable to Kennedy-Wilson Holdings, Inc. common shareholders

P A G E

9 5

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(continued)

December 31, 2014, 2013 and 2012

For the Year Ended December 31, 2012

(dollars in millions)

Consolidating Statement of Operations

Parent

KennedyGuarantor Wilson, Inc. Subsidiaries(1)

Non-guarantor Subsidiaries

Elimination

Consolidated Total

Revenue Investment management, property services, and research fees Rental and hotel Loans and Other Income

$

— — —

$ 0.9 — —

$ 24.5 1.3 2.8

$ 27.9 7.2 —

$

— — —

$ 53.3 8.5 2.8

Sale of real estate

—

—

2.3

—

—

2.3

Total revenue

—

0.9

30.9

35.1

—

66.9

— —

0.3 —

3.6 1.3

0.7 3.2

4.6 4.5

— 8.1 —

— 25.7 9.8

2.2 11.6 3.9

— 10.4 5.8

2.2 55.8 19.5

Operating expenses Commission and marketing expenses Rental and hotel operating expenses Cost of real estate sold Compensation and related expenses General and administrative Depreciation and amortization

—

0.3

0.9

3.7

Total operating expenses Income from unconsolidated investments

8.1

36.1

23.5

23.8

4.9 —

91.5

—

1.5

21.4

5.0

15.0

66.3

38.3

0.1

(119.7)

—

6.9

32.6

67.1

16.4

(119.7)

3.3

Acquisition related gain Acquisition related expenses Interest expense - corporate debt Interest expense - investment

— — —

— — (25.6)

— (0.1) (0.5)

25.5 (0.6) —

— — —

25.5 (0.7) (26.1)

—

—

—

(2.5)

—

(2.5)

Other income (expense)

—

7.2

(0.2)

—

—

7.0

6.9

14.2

66.3

38.8

(119.7)

6.5

—

0.7

—

(0.5)

—

0.2

6.9

14.9

66.3

38.3

(119.7)

6.7

—

—

(0.3)

(2.2)

—

(2.5)

Income (loss) from consolidated subsidiaries Operating income

27.9

Non-operating income (expense)

Income before benefit from income taxes Benefit from income taxes Net income (loss) Net income attributable to the noncontrolling interests Net income attributable to Kennedy-Wilson Holdings, Inc. Preferred dividends and accretion of preferred stock issuance costs Net income (loss) attributable to Kennedy-Wilson Holdings, Inc. common shareholders

P A G E

9 6

6.9

14.9

66.0

36.1

(119.7)

4.2

(8.1)

—

—

—

—

(8.1)

$ (1.2)

$ 14.9

$ 66.0

$ 36.1

$ (119.7)

$ (3.9)

For the Year Ended December 31, 2014

(dollars in millions)

Consolidated Statement of Comprehensive Income

Parent

KennedyWilson, Inc.

Net Income

$ 90.1

$106.0

$278.4

(0.2) (46.4) (7.1)

(0.2) (46.4) (7.1)

— 1.9 1.2

Other comprehensive income (loss), net of tax: Unrealized gain (loss) on marketable securities Unrealized foreign currency translation gain (loss) Amounts reclassified from accumulated other comprehensive income Unrealized forward contract forward currency gain (loss)

—

$(599.9)

$ 90.1

— (41.0) (8.3)

0.2 85.5 14.2

(0.2) (46.4) (7.1)

15.2

(36.4)

16.3

$ 63.5

$(37.4)

68.6

286.4

181.4

(536.4)

52.7

—

—

(15.6)

—

(15.6)

$ 52.7

$ 68.6

$286.4

$165.8

$(536.4)

$ 37.1

Consolidated Statement of Comprehensive Income

Parent

KennedyWilson, Inc.

Net Income (loss)

$ 13.9

$21.7

$105.4

(9.3) 2.8

(9.3) 2.8

3.1

Comprehensive income attributable to Kennedy-Wilson Holdings, Inc.

52.7

$215.5

$ (34.1)

Comprehensive income attributable to noncontrolling interests

16.3 $ (37.4)

Consolidated Total

8.0

Comprehensive income

16.3

Elimination

4.9

Total other comprehensive income (loss) for the period

$(37.4)

Guarantor Non-guarantor Subsidiaries Subsidiaries

$

For the Year Ended December 31, 2013

(dollars in millions)

Other comprehensive income (loss), net of tax: Unrealized foreign currency translation gain (loss) Amounts reclassified from accumulated other comprehensive income Unrealized forward contract forward currency gain (loss) Total other comprehensive income (loss) for the period Comprehensive income (loss) Comprehensive income attributable to noncontrolling interests Comprehensive income (loss) attributable to Kennedy-Wilson Holdings, Inc.

Elimination

Consolidated Total

$ 51.3

$(178.4)

$ 13.9

(10.0) 2.8

0.8 —

18.5 (5.6)

(9.3) 2.8

3.1

5.0

—

(8.1)

3.1

(3.4)

(3.4)

(2.2)

0.8

4.8

(3.4)

$ 10.5

$ 18.3

$103.2

$ 52.1

$(173.6)

$ 10.5

— $ 10.5

— $ 18.3

Guarantor Non-guarantor Subsidiaries Subsidiaries

— $103.2

Consolidated Statement of Comprehensive Income

Parent

KennedyWilson, Inc.

Net Income (loss)

$ 6.9

$14.9

$ 66.3

3.3 (1.5)

3.3 (1.5)

5.7

5.7

Unrealized forward contract forward currency gain (loss) Total other comprehensive income (loss) for the period Comprehensive income (loss) Comprehensive income attributable to noncontrolling interests Comprehensive income (loss) attributable to Kennedy-Wilson Holdings, Inc.

$ 31.8

—

(20.3)

$(173.6)

$ (9.8)

For the Year Ended December 31, 2012

(dollars in millions)

Other comprehensive income (loss), net of tax: Unrealized gain (loss) on marketable securities Unrealized foreign currency translation gain (loss)

(20.3)

Guarantor Non-guarantor Subsidiaries Subsidiaries

Elimination

Consolidated Total

$ 38.3

$(119.7)

$ 6.7

— (2.2)

— (0.3)

(3.3) 4.0

3.3 (1.5)

6.4

—

(12.1)

5.7

7.5

7.5

4.2

(0.3)

(11.4)

7.5

$ 14.4

$ 22.4

$ 70.5

$ 38.0

$(131.1)

$ 14.2

— $ 14.4

— $ 22.4

— $ 70.5

(2.6) $ 35.4

K E N N E D Y - W I L S O N

— $(131.1)

H O L D I N G S ,

(2.6) $ 11.6

I N C .

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(continued)

December 31, 2014, 2013 and 2012

For the Year Ended December 31, 2014

(dollars in millions)

Condensed Consolidating Statements of Cash Flows

Parent

Net cash provided by operating activities

$(1.0)

KennedyWilson, Inc. $(203.8)

Guarantor Subsidiaries $125.1

Non-guarantor Subsidiaries $177.8

Consolidated Total $ 98.1

Cash flows from investing activities: Additions to loans Collections of loans Nonrefundable escrow deposits Net proceeds from sale of real estate Purchases of and additions to real estate Investment in marketable securities Proceeds from sale of marketable securities Investing distributions from unconsolidated investments Contributions to unconsolidated investments Proceeds from settlement of foreign forward contracts Purchases of foreign currency options (Investments in) distributions from consolidated subsidiaries, net Net cash (used in) provided by investing activities

— — — — — — — — — — — (142.5) (142.5)

— — — — (0.6) — — 0.3 (2.0) — — (172.8) (175.1)

(10.7) 15.1 — — (141.5) (11.5) 8.6 52.1 (70.8) — — (89.7) (248.4)

(526.1) 80.8 (47.7) 24.7 (1,820.1) — — 59.4 (94.9) 14.4 (2.7) 405.0 (1,907.2)

(536.8) 95.9 (47.7) 24.7 (1,962.2) (11.5) 8.6 111.8 (167.7) 14.4 (2.7) — (2,473.2)

— — — — — — — — 190.6 (8.2) — (38.9) — —

647.2 (350.0) (40.0) 215.0 (90.0) — — (13.3) — — — — — —

— — — — — 68.8 (0.7) (1.0) — — — — — —

— — — — — 1,215.0 (345.1) (24.4) — — 1,827.2 — (51.0) 19.9

647.2 (350.0) (40.0) 215.0 (90.0) 1,283.8 (345.8) (38.7) 190.6 (8.2) 1,827.2 (38.9) (51.0) 19.9

—

—

—

(57.7)

(57.7)

143.5 —

368.9 —

67.1 —

2,583.9 (28.8)

3,163.4 (28.8)

Cash flow from financing activities: Borrowings under senior notes payable Repayment of senior notes payable Repayments of junior subordinated debt Borrowings under lines of credit Repayment of lines of credit Borrowings under investment debt Repayment of investment debt Debt issue costs Issuance of common stock Repurchase of common stock Proceeds from the issuance of KWE shares, net Dividends paid Acquisitions of noncontrolling interests Contributions from noncontrolling interests Distributions to noncontrolling interests Net cash provided by (used in) financing activities Effect of currency exchange rate changes on cash and cash equivalents

—

(10.0)

(56.2)

825.7

759.5

Cash and cash equivalents, beginning of year

Net change in cash and cash equivalents

—

48.2

77.2

52.8

178.2

Cash and cash equivalents, end of year

$ —

$ 38.2

$ 21.0

$878.5

$937.7

K E N N E D Y - W I L S O N

H O L D I N G S ,

I N C .

(dollars in millions)

For the Year Ended December 31, 2013

0.6

KennedyWilson, Inc. $ (67.0)

Guarantor Subsidiaries $ 47.6

Non-guarantor Subsidiaries $ 50.1

Consolidated Total $ 31.3

— — — — — — — — — — —

(39.6) 7.8 — — (4.0) 10.0 — (1.4) — 0.4 (2.3)

(22.1) 38.1 9.8 (62.4) — — 6.6 — (3.7) 167.8 (230.2)

— 0.1 0.3 (106.1) — — — — — 7.2 (125.1)

(61.7) 46.0 10.1 (168.5) (4.0) 10.0 6.6 (1.4) (3.7) 175.4 (357.6)

(Investments in) distributions from consolidated subsidiaries, net

(262.6)

104.4

43.8

114.4

—

Net cash (used in) provided by investing activities Cash flow from financing activities: Borrowings under lines of credit Repayment of lines of credit Borrowings under investment debt Repayment of investment debt Debt issue costs Issuance of common stock Repurchase of common stock Repurchase of warrants Exercise of warrants Dividends paid Contributions from noncontrolling interests Distributions from noncontrolling interests

(262.6)

75.3

(52.3)

(109.2)

(348.8)

— — — — — 275.9 (3.8) (1.4) 15.4 (24.1) — —

125.0 (125.0) — — (1.3) — — — — — — —

— — 41.1 — (0.3) — — — — — — —

— — 71.4 (1.7) (0.6) — — — — — 1.4 (0.6)

125.0 (125.0) 112.5 (1.7) (2.2) 275.9 (3.8) (1.4) 15.4 (24.1) 1.4 (0.6)

Condensed Consolidating Statements of Cash Flows

Cash flows (used in) provided by operating activities:

Parent $

Cash flows from investing activities: Additions to loans Collections of loans Net proceeds from sale of real estate Purchases of and additions to real estate Nonrefundable escrow deposits Settlement of short term investments Sale of participation interests Capitalized development costs Investment in marketable securities Investing distributions from unconsolidated investments Contributions to unconsolidated investments

Intercompany receivables, net Net cash provided by financing activities Effect of currency exchange rate changes on cash and cash equivalents Net change in cash and cash equivalents Cash and cash equivalents, beginning of year Cash and cash equivalents, end of year

$

—

(23.5)

—

23.5

—

262.0

(24.8)

40.8

93.4

371.4

—

0.2

2.6

0.6

3.4

—

(16.3)

38.7

34.9

57.3

—

64.5

38.5

17.9

120.9

—

$ 48.2

$ 77.2

$ 52.8

$ 178.2

P A G E

9 9

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(continued)

December 31, 2014, 2013 and 2012

For the Year Ended December 31, 2013

(dollars in millions)

Condensed Consolidating Statements of Cash Flows Cash flows (used in) provided by operating activities:

$ (0.6)

KennedyWilson, Inc. $ (59.1)

Guarantor Subsidiaries $ 82.2

Non-guarantor Subsidiaries $ (5.8)

Consolidated Total $ 16.7

— — — — — — — — (82.1) (82.1)

(17.1) 9.3 18.7 — (10.0) 34.1 — (1.2) (116.0) (82.2)

(167.9) 6.8 — (33.8) — — 96.1 (250.2) 194.6 (154.4)

— 0.1 — (85.2) — — 0.7 (0.1) 3.5 (81.0)

(185.0) 16.2 18.7 (119.0) (10.0) 34.1 96.8 (251.5) — (399.7)

—

160.3

—

—

160.3

— — — — 106.2 (1.6) (21.9) — — —

85.8 (85.8) — (7.3) — — — — — —

— — 108.2 — — — — — — —

— — 49.5 — — — — (0.5) 0.4 (4.9)

85.8 (85.8) 157.7 (7.3) 106.2 (1.6) (21.9) (0.5) 0.4 (4.9)

—

(42.9)

—

42.9

—

Parent

Cash flows from investing activities: Additions to loans Settlements of loans Net proceeds from sale of real estate Purchases of and additions to real estate Short term investment Proceeds from marketable securities Distributions from unconsolidated investments Contributions to unconsolidated investments (Investments in) distributions from consolidated subsidiaries, net Net cash provided by (used in) investing activities

Cash flow from financing activities: Borrowings under notes payable Borrowings under lines of credit Repayment of lines of credit Borrowings under investment debt Debt issuance costs Issuance of common stock Repurchase of warrants Dividends paid Acquisitions of noncontrolling interests Contributions from noncontrolling interests Distributions from noncontrolling interests Intercompany receivables, net

82.7

110.1

108.2

87.4

388.4

Effect of currency exchange rate changes on cash and cash equivalents

Net cash (used in) provided by financing activities

—

(0.1)

—

(0.3)

(0.4)

Net change in cash and cash equivalents Cash and cash equivalents, beginning of year

— —

(31.3) 95.8

36.0 2.5

0.3 17.6

5.0 115.9

—

$ 64.5

$ 38.5

$ 17.9

$ 120.9

Cash and cash equivalents, end of year

P A G E

1 0 0

$

NOTE 20—UNAUDITED QUARTERLY INFORMATION Year ended December 31, 2014 (dollars in millions, except earnings per share amounts)

Revenues Operating expenses Income from unconsolidated investments

First Quarter

Second Quarter

Third Quarter

Fourth Quarter

$51.4 60.8

$91.9 88.5

$113.7 114.2

$141.6 139.6

2.8

31.0

12.1

8.3

Operating income (loss)

(6.6)

34.4

11.6

10.3

Non-operating (expenses) income

65.2

54.7

(8.0)

(39.2)

Income (loss) before provision for income taxes

58.6

89.1

3.6

(28.9)

(Provision for) benefit from income taxes

(8.8)

(25.4)

(6.6)

8.4

Net income (loss) Net (income) loss attributable to noncontrolling interests Preferred stock dividends and accretion of issuance costs

49.8 (37.4) (2.0)

63.7 (25.3) (2.1)

(3.0) 2.8 (2.0)

(20.5) (8.3) (2.0)

Net (loss) income attributable to Kennedy-Wilson Holdings, Inc. common shareholders

$10.4

$36.3

$(2.2)

$(30.8)

Basic (loss) earnings per share Diluted (loss) earnings per share

$0.12 $0.12

$0.39 $0.38

$(0.03) $(0.03)

$(0.35) $(0.35)

First Quarter

Second Quarter

Third Quarter

Fourth Quarter

$ 22.9 27.7

$ 36.5 40.1

$33.6 37.3

$30.1 44.0

Income from unconsolidated investments

2.1

14.8

13.2

11.3

Operating income (loss)

(2.7)

11.2

9.5

(2.6)

Non-operating (expenses) income

(1.7)

(13.0)

(11.4)

27.5

Income (loss) before provision for income taxes

(4.4)

(1.8)

(1.9)

24.9

(Provision for) benefit from income taxes

1.7

0.5

(0.8)

(4.3)

Net income (loss)

(2.7)

(1.3)

(2.7)

20.6

Year ended December 31, 2013 (dollars in millions, except earnings per share amounts)

Revenues Operating expenses

Net (income) loss attributable to noncontrolling interests Preferred stock dividends and accretion of issuance costs

1.0

0.9

0.7

(22.9)

(2.0)

(2.1)

(2.0)

(2.0)

Net (loss) income attributable to Kennedy-Wilson Holdings, Inc. common shareholders

$ (3.7)

$ (2.5)

$ (4.0)

$ (4.3)

Basic (loss) earnings per share Diluted (loss) earnings per share

$ (0.06) (0.06)

$ (0.03) (0.03)

$(0.06) (0.06)

$(0.05) $(0.05)

NOTE 21—SUBSEQUENT EVENTS

£443.6 million or approximately $670 million. The closing of the balance

Since December 31, 2014, the Company and its equity partners have

of the portfolio under contract (17 properties for a total of £59.4 million

completed total acquisitions of $825.5 million, including $764.3 million

or approximately $89 million) is scheduled to take place on a staggered

by KWE.

basis during the next 12 months as various conditions under the purchase

In February 2015, KWE closed the acquisition of 163 of 180 mixed-use

agreement are satisfied.

properties located throughout the United Kingdom for a purchase price of

K E N N E D Y - W I L S O N

H O L D I N G S ,

I N C .

PERFORMANCE GRAPH

The graph below compares the cumulative total return of our common stock from December 31, 2009 through December 31, 2014, with the comparable cumulative return of companies comprising the S&P 500 Index, a peer company previously used, and the S&P 500 Financials index. The graph plots the growth in value of an initial investment of $100 in each of our common stock, the S&P 500 Index, a peer company previously used, and the S&P 500 Financials index for the five-year period ended December 31, 2014, and assumes reinvestment of all dividends, if any, paid on the securities. The stock price performance shown on the graph is not necessarily indicative of future price performance.

Previous Peer Company

S&P 500

KW

$350.00

S&P 500 Financials

$300.00

$250.00 $200.00

$150.00

$100.00 $50.00

12/31/2014

8/31/2014

10/31/2014

6/30/2014

4/30/2014

2/28/2014

12/31/2013

8/31/2013

10/31/2013

6/30/2013

4/30/2013

2/28/2013

12/31/2012

8/31/2012

10/31/2012

6/30/2012

4/30/2012

2/29/2012

12/31/2011

8/31/2011

10/31/2011

6/30/2011

4/30/2011

2/28/2011

12/31/2010

8/31/2010

10/31/2010

6/30/2010

4/30/2010

2/28/2010

12/31/2009

$-

The Company previously used CB Richard Ellis, a large commercial real estate services firm, as a comparable peer company. However, management no longer believes this comparison to be relevant given the diversification of Kennedy Wilson’s business structure, the growth of our investment business (both domestically and internationally) and the corresponding growth of Kennedy Wilson’s investment management platform. Going forward, Kennedy Wilson will use the S&P 500 Financials index, which is a subsector of the S&P 500 index and includes real estate companies and other diversified financial services companies. The information under this caption, “Performance Graph,” is deemed not to be incorporated by reference into any filings under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, except to the extent that such filing specifically states otherwise. Purchases of Equity Securities by the Company and Affiliated Purchasers in the Fourth Quarter of 2014 None.

K E N N E D Y - W I L S O N

H O L D I N G S ,

I N C .

MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES STOCK PRICE INFORMATION

DIVIDENDS

Our common stock trades on the NYSE under the symbol “KW.” The following

We declared and paid quarterly dividends of $0.09 per share and $0.07 per

table sets forth, for the calendar quarter indicated, the high and low sales

share in 2014 and 2013, respectively.

prices per share of common stock as reported on the NYSE. The quotations

Cumulative dividends on our Series A and Series B Preferred Stock accrue

listed below reflect inter dealer prices, without retail markup, markdown or

at an annual rate of 6.00% and 6.452%, respectively, of the liquidation prefer-

commission and may not necessarily represent actual transactions.

ence, subject to adjustment under certain circumstances. The Series A and B

Common Stock High Fiscal year 2014 Quarter ended March 31, 2014 Quarter ended June 30, 2014 Quarter ended September 30, 2014 Quarter ended December 31, 2014 Fiscal year 2013 Quarter ended March 31, 2013 Quarter ended June 30, 2013 Quarter ended September 30, 2013 Quarter ended December 31, 2013

Low

Preferred Stock are mandatorily convertible on May 19, 2015 and November 3, 2018, respectively. The dividends are payable quarterly in arrears when, as and if declared by our board of directors.

$26.50 26.91 27.29 28.00

$21.45 20.50 23.19 23.31

The declaration and payment of any future dividends is at the sole discretion of our board of directors and will depend on, among other things, our operating results, overall financial condition, capital requirements and general business conditions. Amounts shown in millions

Preferred

Common

2009

$ 3.2

$ —

HOLDERS

2010 2011 2012 2013

4.5 8.7 8.1 8.1

— 5.7 11.7 21.8

As of February 28, 2015, we had approximately 158 holders of record of our

2014

17.24 18.00 19.72 22.38

13.87 14.53 16.73 18.02

Aggregate dividends declared since inception

common stock.

Total $

3.2 4.5 14.4 19.8 29.9

8.1

33.7

41.8

$40.7

$72.9

$113.6

RECENT SALES OF UNREGISTERED SECURITIES None EQUITY COMPENSATION PLAN INFORMATION See Item 12—“Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.”

P A G E

1 0 3

FORWARD-LOOKING STATEMENTS

Statements made by us in this report and in other reports and statements released by us that are not historical facts constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). These forward-looking statements are necessarily estimates reflecting the judgment of our senior management based on our current estimates, expectations, forecasts and projections and include comments that express our current opinions about trends and factors that may impact future operating results. Disclosures that use words such as “believe,” “anticipate,” “estimate,” “intend,” “could,” “plan,” “expect,” “project” or the negative of these, as well as similar expressions, are intended to identify forward-looking statements.

s our ability to retain major clients and renew related contracts; s trends in use of large, full-service commercial real estate providers; s changes in tax laws in the United States, Ireland, United Kingdom, Spain or Japan that reduce or eliminate deductions or other tax benefits we receive; s our ability to repatriate investment funds in a tax-efficient manner; s future acquisitions may not be available at favorable prices or upon advantageous terms and conditions; and s costs relating to the acquisition of assets we may acquire could be higher than anticipated. Any such forward-looking statements, whether made in this report or elsewhere, should be considered in the context of the various disclosures

Forward-looking statements are not guarantees of future performance,

made by us about our businesses including, without limitation, the risk factors

rely on a number of assumptions concerning future events, many of which

discussed in this Annual Report. Except as required under the federal secu-

are outside of our control, and involve known and unknown risks and uncer-

rities laws and the rules and regulations of the U.S. Securities and Exchange

tainties that could cause our actual results, performance or achievement,

Commission (the “SEC”), we do not have any intention or obligation to update

or industry results, to differ materially from any future results, performance

publicly any forward-looking statements, whether as a result of new informa-

or achievements, expressed or implied by such forward-looking statements.

tion, future events, changes in assumptions, or otherwise.

Although we believe that our plans, intentions, expectations, strategies and

In this report, (i) Kennedy-Wilson Holdings, Inc. is referred to as “Kennedy

prospects as reflected in or suggested by those forward-looking statements

Wilson” or "KWH,"; (ii) Kennedy-Wilson Holdings, Inc. and its subsidiaries

are reasonable, we do not guarantee that the transactions and events de-

are collectively referred to as "The Company,” “we,” “us” or “our,” unless the

scribed will happen as described (or that they will happen at all). For a further

context requires otherwise; and (iii) KWE refers to Kennedy Wilson Europe

discussion of these and other factors that could impact our future results,

Real Estate plc, a London Stock Exchange listed company that the Company

performance or transactions, please carefully read “Risk Factors” in Part I,

externally manages through a wholly owned subsidiary.

Item 1A below in addition to the following factors: s disruptions in general economic and business conditions, particularly in geographies where our business may be concentrated;

Assets Under Management or "AUM" AUM generally refers to the properties and other assets with respect to which

s volatility and disruption of the capital and credit markets, higher interest rates, higher loan costs, less desirable loan terms and a reduction in

we provide (or participate in) oversight, investment management services

the availability of mortgage loans, all of which could increase costs and

loans, and investments in joint ventures. Our AUM is principally intended to

could limit our ability to acquire additional real estate assets;

reflect the extent of our presence in the real estate market, not the basis for

and other advice, and which generally consist of real estate properties or

s continued high levels of, or increases in, unemployment and general slowdowns in commercial activity;

determining our management fees. Our AUM consists of the total estimated

s our leverage and ability to refinance existing indebtedness or incur additional indebtedness;

either owned by third parties, wholly owned by us or held by joint ventures

s an increase in our debt service obligations; s our ability to generate a sufficient amount of cash to satisfy working cap-

and client accounts have invested. Committed (but unfunded) capital from

ital requirements and to service our existing and future indebtedness; s our ability to achieve improvements in operating efficiency; s foreign currency fluctuations;

fair value of the real estate properties and other real estate related assets and other entities in which our sponsored funds or investment vehicles investors in our sponsored funds is not included in our AUM. The estimated value of development properties is included at estimated completion cost. Operating Associates

s performance of our foreign currency hedge instruments; s adverse changes in the securities markets;

Operating associates generally refer to individuals that are employed by or

s our ability to retain our senior management and attract and retain qualified and experienced employees;

other service providers that we manage and oversee on a day-to-day basis

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affiliated with third-party consultants, contractors, property managers or with respect to our investments and services businesses.

Non-GAAP Measures and Certain Definitions Consolidated EBITDA represents net income before noncontrolling interest income, interest expense, our share of interest expense included in income from unconsolidated investments, depreciation and amortization, our share of depreciation and amortization included in income from unconsolidated investments, loss on early extinguishment of corporate debt and income taxes for the Company. We do not adjust Consolidated EBITDA for gains or losses on the extinguishment of mortgage debt as we are in the business of purchasing discounted notes secured by real estate and, in connection with these note purchases, we may resolve these loans through discounted payoffs with the borrowers. Consolidated EBITDA is not a recognized term under U.S. generally accepted accounting principles, or GAAP, and does not purport to be an alternative to net earnings as a measure of operating performance or to cash flows from operating activities as a measure of liquidity. Additionally, Consolidated EBITDA is not intended to be a measure of free cash flow available for management’s discretionary use, as it does not remove all non-cash items (such as acquisition related gains) or consider certain cash requirements such as interest payments, tax payments and debt service requirements. Our presentation of Consolidated EBITDA has limitations as an analytical tool,

operating performance. Additionally, we believe Adjusted EBITDA is useful to investors to assist them in getting a more accurate picture of our results from operations. However, Consolidated EBITDA and Adjusted EBITDA are not recognized measurements under GAAP and when analyzing our operating performance, readers should use Consolidated EBITDA and Adjusted EBITDA in addition to, and not as an alternative for, net income as determined in accordance with GAAP. Because not all companies use identical calculations, our presentation of Consolidated EBITDA and Adjusted EBITDA may not be comparable to similarly titled measures of other companies. Furthermore, Consolidated EBITDA and Adjusted EBITDA are not intended to be a measure of free cash flow for our management’s discretionary use, as it does not remove all non-cash items (such as acquisition related gains) or consider certain cash requirements such as tax and debt service payments. The amounts shown for Consolidated EBITDA and Adjusted EBITDA also differ from the amounts calculated under similarly titled definitions in our debt instruments, which are further adjusted to reflect certain other cash and noncash charges and are used to determine compliance with financial covenants and our ability to engage in certain activities, such as incurring additional debt and making certain restricted payments.

and you should not consider it in isolation or as a substitute for analysis of

Adjusted fees refers to the Company’s investment management, property

our results as reported under GAAP. Our management believes Consolidated

services and research fees adjusted to include fees eliminated in consolidation

EBITDA is useful in evaluating our operating performance compared to that

and Kennedy Wilson’s share of fees in unconsolidated service businesses.

of other companies in our industry because the calculation of Consolidated

Adjusted Net Asset Value is calculated by KWE as net asset value adjusted to

EBITDA generally eliminates the effects of financing and income taxes and the

include properties and other investment interests at fair value and to exclude

accounting effects of capital spending and acquisitions. Such items may vary

certain items not expected to be realized in a long-term investment property

for different companies for reasons unrelated to overall operating performance.

business model such as the fair value of financial derivatives and deferred

Additionally, we believe Consolidated EBITDA is useful to investors to assist

taxes on property valuation surpluses.

them in getting a more accurate picture of our results from operations. Adjusted Net Income represents Consolidated Adjusted Net Income as Acquisition-related gains - Acquisition-related gains consist of non-cash gains

defined below, adjusted to exclude net income attributable to noncontrolling

recognized by the Company upon a GAAP required fair value measurement

interests, before depreciation and amortization.

due to a business combination. These gains are typically recognized when the Company converts a loan into consolidated real estate owned and the

Consolidated Adjusted Net Income represents net income before depreciation

fair value of the underlying real estate exceeds the basis in the previously

and amortization, our share of depreciation and amortization included in income

held loan. These gains also arise when there is a change of control of an

from unconsolidated investments and share based compensation expense.

investment. The gain amount is based upon the fair value of the Company’s

Consolidated investment account refers to the sum of the Company’s equity

equity in the investment in excess of the carrying amount of the equity directly

in: cash held by consolidated investments, consolidated real estate and

preceding the change of control.

acquired in-place leases, unconsolidated investments and consolidated loans

Adjusted EBITDA represents Consolidated EBITDA, as defined above,

gross of accumulated depreciation and amortization.

adjusted to exclude corporate merger and acquisition related expenses, share

Equity partners refers to subsidiaries that we consolidate in our financial

based compensation expense for the Company and EBITDA attributable to

statements under GAAP (other than wholly-owned subsidiaries), including

noncontrolling interests. Our management uses Adjusted EBITDA to analyze

KWE, and third-party equity providers.

our business because it adjusts Consolidated EBITDA for items we believe do not accurately reflect the nature of our business going forward or that relate to non-cash compensation expense or noncontrolling interests. Such items may vary for different companies for reasons unrelated to overall

Investment account refers to the consolidated investment account presented after noncontrolling interest in invested assets gross of accumulated depreciation.

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RECONCILIATION OF NET INCOME TO CONSOLIDATED EBITDA AND ADJUSTED EBITDA

Year Ended December 31, (dollars in millions)

Net income

2014

2013

2012

2011

2010

2009

$90.1

$13.9

$6.7

$7.5

$6.5

$ (9.7)

103.4 27.3

51.7 —

28.6 —

20.6 —

7.7 4.8

13.2 —

35.5

45.0

29.5

23.5

13.8

10.5

104.5

17.4

4.9

2.7

1.6

1.1

47.1

46.7

22.6

13.9

10.0

7.5

Non-GAAP adjustments: Add back: Interest expense - investment Early extinguishment of corporate debt Kennedy Wilson’s share of interest expense included in investment in unconsolidated investments Depreciation and amortization Kennedy Wilson’s share of depreciation and amortization included in unconsolidated investments Provision for (benefit from) income taxes Consolidated EBITDA(1) Share-based compensation EBITDA attributable to noncontrolling interests Merger related compensation expenses Adjusted EBITDA(2)

32.4

2.9

(0.2)

(2.0)

3.7

(4.0)

440.3

177.6

92.1

66.2

48.1

18.6

15.8 (138.3) —

7.5 (26.0) —

8.1 (2.8) —

5.1 (1.0) —

8.1 (3.0) 2.2

2.3 (5.7) 16.1

$317.8

$159.1

$97.4

$70.3

$55.4

$31.3

(1)(2) See definitions in Non-GAAP Measures and Certain Definitions above. Prior to 2014, the Company reported an Adjusted EBITDA metric that was comparable to the Company’s current Consolidated EBITDA metric, as it was calculated as Consolidated EBITDA, adjusted to solely exclude merger related expenses and share based compensation expense. Beginning in 2014, as noncontrolling interests became more significant on the Company’s consolidated balance sheet, primarily due to the consolidation of KWE’s results in the Company’s financial statements, the Company determined that it was appropriate to supplement Consolidated EBITDA with a revised metric. Adjusted EBITDA shown above is calculated as Consolidated EBITDA, adjusted to exclude share based compensation expense and EBITDA attributable to noncontrolling interests. As set forth in the reconciliation table above, EBITDA attributable to noncontrolling interests for the years ended December 31, 2014, 2013, 2012, 2011, 2010 and 2009 were $138.3 million, $26.0 million, $2.8 million, $1.0 million, $3.0 million and $5.7 million, respectively.

ADJUSTED FEES (UNAUDITED) Year Ended December 31, 2014

2013

Investment management, property services and research fees Non-GAAP adjustments: Add back: Fees eliminated in consolidation(1) KW share of fees in unconsolidated service businesses(2)

$ 82.6

$ 68.1

21.6 16.8

4.3 —

Adjusted Fees

$ 121.0

$ 72.4

(dollars in millions)

(1) The year ended December 31, 2014 includes $14.3 million of fees recognized in net (income) loss attributable to noncontrolling interests relating to the portion of fees paid by noncontrolling interest holders in KWE and equity partner investments. There is no comparable activity in the prior period since KWE and the consolidation of non-wholly owned investments occurred during 2014. (2) Included in income from unconsolidated investments relating to the Company's investment in a servicing platform in Spain. The investment was made during the fourth quarter of 2013.

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INVESTMENT LEVEL BALANCE SHEET (1) (UNAUDITED) The following estimated investment level balance sheet represents the estimated combined balance sheets of consolidated investments and investments in which Kennedy Wilson has an ownership interest(2):

Year Ended December 31, (dollars in millions)

Assets Cash and cash equivalents Real estate and acquired in place lease values, net of accumulated depreciation and amortization(3) Loans Other assets Total assets Liabilities and equity Liabilities Accounts payable, accrued expenses and other liabilities Investment debt Total liabilities

2014

2013

$ 839.9 7,410.8 464.8 425.0

$ 126.5 5,382.9 358.8 361.7

$9,140.5

$6,229.9

$ 196.4 4,112.7 4,309.1

$ 170.8 3,320.7 3,491.5

4,831.4

2,738.4

$9,140.5

$6,229.9

Equity Total equity Total liabilities and equity

(1) Kennedy Wilson’s Investment Level Estimated Balance Sheet is solely provided to depict the overall size and scope of the operations of the investment portfolio in which Kennedy Wilson has an ownership interest. The Investment Level Estimated Balance Sheet does not include third party assets that Kennedy Wilson manages and does not have an ownership interest. Please also refer to Kennedy Wilson’s Consolidated Balance Sheet on page 10 for its unaudited balance sheets prepared in accordance with U.S. GAAP. (2) The Company has an approximate 32% ownership in our $9.1 billion investment portfolio as of December 31, 2014 and an approximate 39% ownership in our $6.2 billion investment portfolio as of December 31, 2013. (3) Reflects approximately $0.4 billion of accumulated depreciation and amortization.

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K E N N E D Y - W I L S O N

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A N D

S U B S I D I A R I E S

CORPORATE INFORMATION BOARD OF DIRECTORS

EXECUTIVE OFFICERS

CORPORATE HEADQUARTERS

William J. McMorrow Chairman and Chief Executive Officer

William J. McMorrow Chairman and Chief Executive Officer

Norman Creighton Retired President and Chief Executive Officer Imperial Bank (Now Comerica)

Justin Enbody Chief Financial Officer

9701 Wilshire Blvd., Suite 700 Beverly Hills, CA 90212 (310) 887-6400

Cathy Hendrickson Retired President and Chief Executive Officer Bay Cities National Bank (Now Opus Bank) David A. Minella Managing Member Minella Capital Management LLC Kent Y. Mouton Executive Vice President and General Counsel Jerry R. Solomon, CPA Stanley Zax Retired Chairman Zenith National Insurance Corporation

Mary L. Ricks President and Chief Executive Officer Kennedy Wilson Europe Matt Windisch Executive Vice President Kent Y. Mouton Executive Vice President and General Counsel In Ku Lee Senior Vice President and Deputy General Counsel

ANNUAL MEETING Beverly Wilshire 9500 Wilshire Blvd. Beverly Hills, CA 90212 9 a.m., Thursday, June 11, 2015

STOCK LISTING New York Stock Exchange Symbol “KW”

TRANSFER AGENT Continental Stock Transfer 17 Battery Pl., 8th Floor New York, NY 10004 (212) 509-4000

INDEPENDENT AUDITORS KPMG LLP

LEGAL COUNSEL Latham & Watkins LLP

Annual Report Design by Big Pivot Partners / www.bigpivot.net

INVESTOR INFORMATION A copy of our Annual Report on Form 10-K, as filed with the SEC, will be furnished to shareholders and interested investors free of charge upon written request to us at 9701 Wilshire Blvd., Suite 700, Beverly Hills, CA 90212, Attention: Christina Cha, Vice President of Corporate Communication.

Certain of the matters discussed herein are discussed more fully in our filings with the Securities and Exchange Commission, including our Annual Report on Form 10-K. We filed our Annual Report on Form 10-K for the year ended December 31, 2014, with the SEC on March 2, 2015, which, in the section titled “Risk Factors,” contains a detailed discussion of risks and uncertainties that could cause actual results and events to differ materially from any forward-looking statements contained herein.

O U R

L O C A T I O N S

Atlanta 4166 Buford Hwy. Atlanta, GA 30345

Irvine 18401 Von Karman Avenue, Suite 350 Irvine, CA 92612

O’ahu-Hawaii 68-540 Farrington Hwy. Waialua, HI 96791

San Francisco 300 California St., 2nd Floor San Francisco, CA 94111

Austin 9442 Capital of Texas Hwy. N. Plaza II, Suite 140 Austin, TX 78759

Kona-Hawaii 73-2055 Ala Kohanaiki Kailua-Kona, HI 96740

Oakland 333 Hegenberger Rd., Suite 328 Oakland, CA 94621

Seattle 901 5th Avenue, Suite 2700 Seattle, WA 98164

Las Vegas 8395 W. Sunset Road, Suite 160 Las Vegas, NV 89113

Philadelphia 1101 Market St., Suite 105 Philadelphia, PA 19107

London 50 Grosvenor Hill London, England W1K 3QT

Phoenix 7375 E. 6th Ave., #11 Scottsdale, AZ 85251

St. Helier 47 Esplanade St. Helier, JE1 0BD Jersey

Concord 1850 Gateway Blvd., Suite 130 Concord, CA 94520

Madrid c/ Fernando El Santo, 17 3º Izq. 28010 Madrid, Spain

Sacramento 1860 Howe Avenue Suite 210 Sacramento, CA 95825

Dublin 33 Sir John Rogerson’s Quay Dublin 2, Ireland

Nashville 222 Second Avenue North Nashville, TN 37201

Houston 1880 S. Dairy Ashford, Suite 570 Houston, TX 77077

New York 245 Park Avenue, 39th Floor New York, NY 10167

San Antonio Mercantile Building 40 NE Loop 410, Suite 607 San Antonio, TX 78216

Beverly Hills (Corporate Headquarters) 9701 Wilshire Blvd., Suite 700 Beverly Hills, CA 90212 Chicago 150 S. Wacker Dr., Suite 2725 Chicago, IL 60606

Tokyo Kennedy Wilson Investment Company, Ltd. Toranomon Mitsui Bldg. 14th Floor 3-8-1 Kasumigaseki Chiyoda-ku Tokyo 101-0013 Japan

San Diego Fairbanks Village Plaza 16236 San Dieguito Road, Suite 3-28 Rancho Santa Fe, CA 92067

Seattle

Dublin Chicago

Sacramento Concord San Francisco Oakland

Tokyo

New York London

Philadelphia

Las Vegas Beverly Hills Corporate Headquarters

Nashville Irvine

Atlanta

Phoenix

St. Helier

San Diego Austin Houston

O’ahu

San Antonio Kona Madrid

9701 WI LSHI RE BLVD., SU IT E 700

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